Many small businesses breathed a sigh of relief when Congress passed the $2 trillion CARES Act to help prevent them from going under during the COVID-19 outbreak, providing hope that when it is safe to do so, they can bring their employees back and resume operations.
In the last few weeks, many of these business owners were forced to close their doors, which resulted in no income, or brought the money coming in down to a trickle. These business owners have explained how upsetting it has been to be forced to tell employees, some who’ve been with them for decades, that they couldn’t keep them on because they couldn’t make payroll. The reason that happened is most small businesses have very little cash flow – just enough to pay the bills for a few weeks or a month.
No doubt, many of these small businesses will now take loans to try and remain afloat. To help, the CARES Act has been passed by Congress and signed into law. A provision of the act is the Paycheck Protection Program, which offers forgivable loans to keep businesses open with the additional goal of retaining workers’ jobs.
The influx of cash is meant to buy the business owner time.
These Paycheck Protection Program loans will be forgiven with conditions and must be used for payroll or bills such as rent, lease payments and utilities. The influx of cash is meant to buy the business owner time to save the businesses that they worked so hard to create and keeps the jobs they provide from disappearing.
But there are rules. For example, if the business brings back fewer employees than they had on the job the year prior, the amount of forgiveness would be reduced. And documentation of expenditures would be required for allowable expenses to be forgiven.
The loan is available to businesses with 500 or fewer employees, franchisees, self-employed individuals and a few others. Those small businesses applying will have to certify that the current economic conditions make the loan necessary and support ongoing operations. No personal or individual guarantees are required on these loans.
The Paycheck Protection Program loans have deferred payments on principal, interest and fees for six months and up to a year after issue. The act states the rate will not exceed 4%, although the Treasury has issued guidance saying it should be 1%. If banks don’t accept that rate, it could rise. The loans mature in two years.
Businesses can also consider a Small Business Administration Economic Injury Disaster Loan, but applicants must certify under threat of perjury they believe they are eligible for the loan. Those who apply are also eligible to receive a $10,000 emergency grant that takes only days to issue, although that grant would be subtracted from any loan forgiveness. For small businesses on the edge as a result of this crisis, this important provision will send quick cash to those who need it now to survive.
SBA Economic Injury Disaster Loans are not forgivable but may be better for certain types of businesses. The CARES Act allows businesses with an Economic Injury Disaster Loan to roll them over into the new forgivable variety. Businesses can even apply for both if they are used for different expenses.
The expectation is that very soon, any bank that currently is approved to issue SBA 7(a) loans will soon be welcoming applications for Paycheck Protection Loans. And business owners can apply online. Businesses can contact SBA for information on the Economic Injury Disaster Loan and grant.
The National Federation of Independent Business, which represents 300,000 small businesses nationwide, has many resources on its website to help understand the loans and navigate the process, as well as information about mandated leave and tax credits under the earlier COVID-19 legislation.
Go to NFIB.com for the latest updates, and the NFIB state webpage, NFIB.com/RI, for state-specific information.
Christopher Carlozzi is the National Federation of Independent Business state director in Rhode Island.
(Updated the Treasury guidance on the interest rate for the Paycheck Protection Program to 1%)
