As we live through what is surely one of the scariest and most stressful times in our nation’s history, it’s hard to find the answers we need. Whether you’re trying to figure out if it’s safe to travel or how to get a coronavirus test, information doesn’t come easily and the future looks murky at best.
And as scary and confusing as things are for all of us in the day to day, small business owners have the added stress of deciding whether or not to keep their doors open, to keep employees on payroll, and how long they can stay afloat if the economy doesn’t get a good shot in the arm.
Fortunately, the commercial sector has been thrown a lifeline by way of the $2 trillion economic stimulus bill known as the CARES Act, or Coronavirus Aid, Relief and Economic Security Act. Time will tell how much this stimulus package will do to right the ship, but it makes funds available to people and businesses in need, and I’m going to try to break down how the financial aid for small businesses works.
In short, the bill gave authority to the Small Business Administration (SBA) to provide $349 billion in loans. The SBA has long been the gold standard for business lending, and this program allows the administration to provide 100% guarantees on all of this federal funding. The money aims to help companies looking to cover rent, payroll, and an assortment of other expenses that won’t go away even as this pandemic brings business to a standstill.
This portion of the CARES Act is referred to as the Paycheck Protection Program. There is no shortage of people and industries in need of help from the stimulus package, but allowing the millions of small businesses that serve as such a vital engine for our economy is a primary concern. Since so many stores and restaurants can’t legally open their doors and sell their products, this money will aim to help cover ordinary operational costs while we wait for some kind of normalcy to return.
The most common knock against SBA loans is the application and approval process, with so many businesses applying and only so much money to go around. That problem hasn’t gone away entirely, but the process has been streamlined as much as possible so that qualifying business owners don’t get too discouraged or confused. The form is about five pages long and you’ll need to have some relevant documents on hand, including payroll, rent, supply costs, etc.
If things go to plan, this Paycheck Protection Program will expedite payments by cutting back on the red tape that tends to slow down business borrowing.
Initially, these funds function like any ordinary loan. There’s a borrowing rate and other mechanisms you’d expect from a lender, so it’s not like checks are going in the mail without any sort of contract or oversight.
The difference with this stimulus-sponsored SBA program is that loans can be forgiven when companies use the money to help avoid layoffs or closure during the crises. If jobs are preserved and wages maintained even while workers are told to shelter in place, then the borrowed capital doesn’t need to be reimbursed.
This system should allow companies to stave off financial ruin without employing drastic measures to do so. It also provides some form of checks and balances so that money isn’t misused. Time will tell if the program accomplishes its goals, but for now we can at least move forward knowing that the government has set aside billions of dollars for the sole purpose of protecting small business owners.
There are three main points of criteria a business needs to meet before applying for a loan:
● Business established before February 15, 2020
● 500 or fewer employees
● Negatively impacted by the coronavirus
While there is certainly some wiggle room, the bill primarily targets hospitality and dining related industries, since those businesses have felt the strongest initial impact with travel and non-essential spending coming to a halt. Since we’re only in the beginning stages of our COVID-19 response and businesses are still reeling, loan applicants can get by on “good faith” proposals for how the money will be spent instead of providing detailed plans. As long as you can prove the money went to payroll, mortgage, utilities, and necessary upkeep, your business should remain in good standing.
One of the elements I appreciate most about the Paycheck Protection Program is that, unlike normal SBA provisions, freelance workers and sole proprietorships are eligible to apply. With the gig economy being such a prevalent force in our markets, it’s nice to know that some of the 1099 workers will see a portion of this emergency funding.
As of now, this program runs through June 30, giving business owners three months to seek relief. Even if the full amount of a loan is not forgiven, payments will be deferred at least six months. The deferment period could very well change depending on how long commerce remains shut down while the country tries to mitigate the effects of the virus.
Most loans come with 10-year terms and an interest rate no higher than 4%. As long as employees get paid for a minimum of eight weeks, the SBA says it will forgive the amount of money used to cover all qualifying business expenses during that time frame. Loan amounts are limited by law to 250% of a company’s average monthly payroll, which might make things difficult for business owners already paying down debt and still needing to cover ordinary operating expenses.
As I see it, a potential flaw in the program for many businesses is that debt forgiveness declines with any drop in payroll. For a company employing 50 people, this means two layoffs will make it harder for the owner to pay the 48 remaining employees. The intention of the program is spot-on - focusing on the wellbeing of workers - but the specifics of the forgiveness might make some entrepreneurs hesitant to take on the debt.
That’s an important point I want people to take from this. While the legislation aims to get money into the hands of small business owners so that they can keep employees afloat, the money is still considered a loan. This is not a bailout with no strings attached, but rather a loan with a built-in forgiveness mechanism. And while taking on debt might not make sense in ordinary circumstances, coming out on the other side of this downturn with your business still intact might be worth the price.
It’s a difficult time for almost every business owner, and my heart and sympathy goes out to those who are struggling. The next few months will bring a lot of hard choices and tough times. Take care of your neighbor, take care of yourself, and do the best you can to keep your head up.