THE “CARES” ACT CAN HELP SMALL- AND MEDIUM-SIZED BUSINESSES SURVIVE THE COVID-19 CRISIS

You have likely heard a lot about the Two-Trillion-Dollar Stimulus Package, but what does it really mean to you and your business?

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Under the Paycheck Protection Program, you may be eligible for a loan that you may never have to pay back

You may qualify to receive a loan from the federal government equal to about 2.5 times your monthly payroll costs. If you meet the conditions for how you used the money, when you used the money and whether you kept some or all over your workforce employed, you may never have to pay the loan proceeds back. The purpose of these loans are to keep workers employed. It is known as the “Paycheck Protection Program”.

If you are a business that already qualifies as a small business under the SBA rules, a business or non-profit with 500 or fewer employees, a sole proprietor, an independent contractor, or even self-employed, you may qualify for this Program.

How much can I borrow?

There are different calculations, but put simply, you can borrow up to 2.5 times your monthly payroll cost to a maximum of $10 million. You can also re-finance your SBA Disaster Loan and add that amount on top.

 What can I use the loan proceeds for?

You can use the money you receive for this loan for expenses already allowed under the SBA’s Business Loan Program, plus payroll costs, including the costs of independent contractors, or yourself, if you are self-employed (under certain circumstances). You can pay for group health care benefits and insurance premiums, utilities, rent or lease payments, interest on pre-existing mortgages and interest on other debt that preceded the loan.

Your payments on the loan can be deferred for six months to one year and your loan may be 100% forgiven, if you meet all the criteria.

If your business was operating on February 15, 2020, you are automatically eligible for a deferment on your payments for six months to one year after you received your loan proceeds. If you meet all the forgiveness criteria, and if you provide all the documentation required to prove it, you may have all or part of your loan forgiven and paid for by the U.S. Government.

To qualify for loan forgiveness, you must have been operating your business on February 15, 2020. Only proceeds used in the 8 weeks that followed the loan origination and used to cover payroll, with some exclusions, rent, mortgage interest or utilities are eligible for forgiveness. There are other uses for which you are allowed to use loan proceeds, but only these expenditures count toward amount that may be forgiven.

This Act is intended to preserve jobs and wages, so if you reduced your workforce or reduced wages during a certain period, your forgiveness amount will be reduced according to a formula that takes those reductions into consideration. However, if you laid off employees or reduced wages between February 15 and April 27, 2020, but rehired the employees or raised the  wages again before June 30, 2020, you may still qualify for the full forgiveness relief.

Cost of the loan

Whatever portion of the loan that is not forgiven must be paid back at 4% over a 10-year period.

Don’t wait. Talk to your lender now.

The SBA has to implement the regulations to roll out this program, so the loans won’t be available right away; however,we strongly recommend that anyone considering applying for these loans get in touch with one or more potential lenders as soon as possible, even before the final details of the program are established.  There is certainly a lot of money being made available — $349 billion – but the need is expected to be very high and the eligibility thresholds are low, so no one knows how long these amounts will last or whether they will satisfy everyone in need of support.

SBA Disaster Loan Program can provide emergency cash

The Cares Act also expanded the already-existing SBA Disaster Loan Program and this may be a faster path to emergency cash for COVID-19-impacted businesses. 

The maximum loan under this program is $2 million. Eligible uses for loan proceeds include any purpose already authorized under the SBA Disaster Loan Program, which in the COVID-19 context, includes crisis-related costs for sick leave paid to employees unable to work due to a direct effect of COVID-19, payroll and supply chain costs, rent or mortgage payments, or debts that cannot be paid due to revenue lost as a result of the COVID-19 disaster.

For businesses in need of immediate cash, applicants for the SBA Disaster Loan may request an emergency advance of $10,000, which does not have to be repaid even if the loan is later denied. Advances are disbursed within three days of application.

Interest rates vary between 3.75% and 2.75% depending on the type of entity you have. While the SBA Disaster Loan is not initially a forgivable loan, you may be able to defer payments for up to 4 years or you may be able to refinance the loan under the “Paycheck Protection Program” and if you meet the strict forgiveness criteria, the proceeds of the Disaster Loan may also be forgiven, minus any advance you received.

The CARES Act can also help in other ways

The Cares Act also provides relief through changes in banking laws, employment laws, including unemployment insurance, individual monetary grants and tax relief for businesses and individuals.  It is complex and many-layered and you may require help from different advisors, including your accountant, your lender, your lawyer and others. We at Gravel & Shea are doing our best to provide our clients all the counsel we can and to help them identify other resources and advisors who can help them maximize the relief the CARES Act and other Vermont and federal laws provide in the wake of this unprecedented crisis.

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For more information about how the CARES Act may apply to you or your business, I can be reached at claraeperez@gravelshea.com