Last week, Congress passed and the President signed perhaps the largest single financial rescue package in history in response to the economic damage inflicted by the novel coronavirus outbreak. The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes a number of emergency measures intended to assist small businesses weather the storm and maintain their workforces through this necessary period of limited commercial interaction.
The provision most relevant to employees of small enterprises is the Paycheck Protection Program. This is a unique Federal loan guarantee program to allow businesses to keep workers on the payroll during the period of emergency response, and offers forgiveness of a substantial portion if certain conditions are met.
The PPP is available to businesses with fewer than 500 employees or restaurant and hotel operations with fewer than 500 per location. Sole proprietors, "gig" workers (contractors like Uber drivers) and non-profits are also eligible. Administered through the existing SBA lending process, the new program relaxes the standard SBA restrictions and underwriting criteria. The maximum amount available is limited to 2.5 times the average monthly payroll costs a firm has incurred over the past 12 months, excluding any compensation over $100,000 per individual.
Payroll costs include retirement plan contributions, health insurance and state and local employment taxes.
Proceeds may be used to cover payroll costs as well as rent, mortgage interest payments and utilities. The program provides for forgiveness of up to eight weeks of covered expenses if the borrower maintained its payroll employment throughout the period. Amounts not forgiven can be stretched out up to 10 years.
All current SBA 7(a) lenders are eligible to initiate loans, and the Treasury department expects many more lenders to become eligible in the immediate future. Contact your current financial institution to inquire.
The CARES act also expands a previous disaster relief program, known as EIDL or Economic Injury Disaster Loans. EIDL loans are available to businesses suffering economic hardships due to the coronavirus and are intended to cover expenses that could have been met had the disaster not occurred. Loans are available up to $2 million to businesses with fewer than 500 employees, sole proprietors and independent contractors as well as private non-profit concerns.
If approved for an EIDL loan, the borrower may request an advance at the time of application of up to $10,000 that need not be repaid under any circumstances. The remainder of the loans can be amortized over a period of up to 30 years at an annual rate of 3.75% for businesses and 2.75% for non-profits. EIDL loans cannot be used to cover the same costs as a PPP loan but a firm may borrow under both programs.
Small businesses with existing, non-disaster SBA loans may seek temporary relief under the CARES Act. Under the provision, SBA will cover all loan payments on existing 7(a), 504 and microloans including principal and interest for six months, as well as all new loans initiated within six months of the signing of the Act. The forbearance does not apply to PPP loans.
For businesses that have fully or partially suspended operations as the result of a governmental order limiting commerce, a refundable tax credit is available for up to 50% of wages paid to certain employees during the disruption (excluding companies receiving PPP assistance).
And the CARES Act allows companies to defer payment of their portion of federal employment taxes until 2021 and 2022 (again excluding PPP participants).
Difficult times call for aggressive measures. In terms of size and scope, this effort is unprecedented and may allow many small companies and their workers to survive COVID-19.
Christopher A. Hopkins is a portfolio manager and vice president at Barnett & Co. in Chattanooga.