If your small business is facing financial uncertainty in the wake of the COVID-19 outbreak, you are not alone. To help businesses stay afloat, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The CARES Act provides economic relief to businesses impacted by the coronavirus pandemic through new and expanded loan programs, including the Economic Injury Disaster Loan Program (EIDL) and the Paycheck Protection Program (PPP). If your small business is suffering cash flow problems due to COVID-19, you should consider applying to one or both of these loan programs. Loans will be done on a first come first served basis and there is limited funding so you should get you application in as soon as possible.
The Small Business Administration’s (SBA) Economic Injury Disaster Loan Program (EIDL) was originally created to offer disaster relief to people in federally declared disaster areas. In response to the COVID-19 crisis, the CARES Act allocated an estimated $10 billion to the program and made it available to all businesses in the United States that suffered a substantial economic injury due to COVID-19.
Any business that falls into one of the following categories is eligible for an EIDL loan:
Only businesses in existence on January 31, 2020 are eligible for EIDL loans. There is no longer a requirement that the business have no other credit available.
Businesses can apply for loans of up to $2 million. The loans are long-term—up to a maximum of 30 years—with an interest rate of 3.75% for small businesses and 2.75% for nonprofits. The actual amount of the loan and its term are determined on a case-by-case basis. Businesses must use the money to pay for operating expenses and other business expenses that cannot be met due to COVID-19.
No collateral is required for loans of up to $25,000, and loans of up to $200,000 can be approved without a personal guarantee. In addition, the SBA is authorized to approve loans based solely on the borrower’s credit score; no prior tax returns are required. Borrowers don't have to pay interest during the first year after the loan is approved, although interest accrues during that period.
The loans are made directly by the SBA and can be applied for from the SBA website.
Emergency EIDL cash advances of up to $10,000 are available for businesses experiencing a temporary and urgent need for cash due to the COVID-19 crisis. To be eligible, you must have applied for an EIDL loan from the SBA before December 31, 2020 and you must meet all their loan eligibility requirements. Emergency advances are supposed to be available within three days after the SBA receives the EIDL application.
The $10,000 emergency funds must be used to pay certain expenses related to COVID-19, including:
The $10,000 advance never has to be repaid if it is used exclusively for permitted purposes, even if the SBA ultimately denies the EIDL loan application. However, if you secure a Paycheck Protection Program loan (see below), the $10,000 EIDL grant amount will be subtracted from any amount that is forgivable under the PPP. You apply for the cash advance through the SBA website.
With the goal of protecting employees and helping businesses meet payroll costs in the wake of the COVID-19 crisis, the Paycheck Protection Program (PPP) provides cash to small businesses by issuing government-backed loans through SBA-approved lenders. Unlike EIDL loans, you apply for PPP loans at a local banking institution instead of directly from the SBA. PPP applications will be available starting April 3, 2020 for small businesses and sole proprietors, and starting April 10, 2020 for independent contractors and the self-employed. The deadline for submitting an application is June 30, 2020.
PPP loans are available to businesses with fewer than 500 employees that were in operation on February 15, 2020. Individuals operating as a sole proprietor or independent contractor and 501(c)(3) nonprofits are also eligible for PPP loans. You must have employees to apply for a PPP loan since the loan amount is based on payroll.
The amount of the loan can be 2.5 times the business’s average monthly payroll costs during the year prior to the loan, up to $10 million. The maximum interest rate allowed on the loans is 4% and the maximum term is ten years. No collateral or personal guarantees are required for PPP loans and no payments are due for the first six months to one year.
The money from the loans can be used for payroll and certain other expenses like rent, mortgage interest, and utilities.
One of the major benefits of a PPP loan is that it may be partially forgiven. Money spent during the first eight weeks does not have to be paid back if it is spent on certain specified costs including:
To be eligible for loan forgiveness, the business must not lay off any of its employees for at least eight weeks after the date of the loan. If employee’s wages are cut or employees are laid off during this eight week period, the amount of the loan that is forgivable will be reduced unless the employees are rehired by June 30, 2020. There are certain documentation and other requirements that must be met to qualify for loan forgiveness.
Both the SBA and banks were overwhelmed by the number of loan applications received in the first few weeks after the loan programs opened. Applicants to both the EIDL and PPP loan programs have faced delays and uncertainty in trying to get their applications processed and approved. There is no data yet on how many businesses have received money under the loan programs.