The largest economic stimulus in our Union’s history was cleared by Congress last week and is now law. The good folks at SRW have analyzed the entire 880-page statute to help clarify how it will affect the future of your business.
Many news outlets have reported on the upcoming direct payments to taxpayers, and payments to large corporations. But as entrepreneurs, we want to provide greater clarity around the federally guaranteed loans to our small business brethren.
Pursuant to Title 1, KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT — specifically Section 1102, titled the PAYCHECK PROTECTION PROGRAM — the federal government has set aside almost 350 billion dollars to provide low-interest, federally guaranteed loans to businesses with 500 employees or fewer (i.e. small businesses).
There’s fine print, and here’s what it means for your small business…
I have a company with fewer than 500 employees, does my business qualify?
YES, as long as you can prove that you have paid employees and your business has been adversely affected by COVID-19 (i.e. your business shut down; a client cancelled a contract; a client is delaying payment to you), you may qualify.
I am a sole proprietor, do I qualify?
YES, both sole proprietorships and independent contractors (Form 1099 workers) may qualify.
How big of a loan can I receive?
You can receive a loan up to 250% of your monthly payroll. For instance, if you pay an average of $50,000 a month in payroll, you could receive a loan of up to $125,000. The maximum amount for a loan caps out at $10 million.
What can I use the loan proceeds for?
This is important as it may determine whether your loan will be forgiven or not (see below). Loan proceeds can only be used for: payroll and payroll costs; healthcare costs; rent; utilities; and interest on any debt incurred previously. So you likely cannot use the loan proceeds to purchase new equipment, lease company cars, etc.
Will the loan be forgiven?
Possibly. The purpose of the federally guaranteed loan is to keep people employed. If after a certain period of time (still to be determined), you can prove you did not lay off any workers, you can apply to have the loan forgiven (factors in forgiving the loan still need to be determined by U.S. Treasury Secretary Steven Mnuchin, the U.S. Small Business Administration, etc.) In addition, it is critical you only use the loan proceeds for allowable expenses (otherwise you will have to repay the loan). As noted above, allowable expenses include: Payroll and payroll costs; healthcare costs; rent; utilities; and interest on any debt incurred previously.
Where do I apply for the loan?
The Small Business Administration will administer the loans through “community banks” (for instance, smaller, neighborhood banks in your community) that still need to be determined.
Do I need to put up collateral or provide a personal guarantee?
NO. The loan will be guaranteed by the federal government, so no personal guarantee or collateral is required.
Will the application process be time consuming, burdensome?
In theory, no. In practice, possibly, but you should be able to handle it yourself. It appears that you will need to sign an affidavit that your business qualifies and prove that COVID-19 has detrimentally affected your business. As the details are finalized, it is prudent to gather financial records now (payroll records, cash flow, balance sheets, business emails, etc.), specifically to underscore how COVID-19 has adversely affected your business (i.e. you had to shut down your business; client emails cancelling, suspending contracts; slower client pay that impedes cash flow, etc.)
What will be the interest rate of the loan?
The loan interest cannot exceed 4%, a very low interest rate for borrowing.
Should I apply for the loan?
YES. Since most small businesses have been adversely affected by COVID-19, most will be able to benefit from these needed funds. Plus, if you don’t lay anyone off, you might be able to turn the loan into free money.
If you have additional questions or comments, please do not hesitate to email firstname.lastname@example.org.