Everything you Need to Know about Small Business Relief Options for Covid-19

What are SBA Coronavirus Loans?

In order to combat the economic downturn arising out of the novel coronavirus pandemic (Covid-19), the US government passed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to support individuals and small businesses.

The CARES Act created a new type of SBA Loan, the Paycheck Protection Program, in addition to revamping existing programs in order to support small businesses and private nonprofits with fewer than 500 employees (there are some exceptions for larger hotel and restaurant businesses).

Here are the 4 SBA loan programs to consider:

Paycheck Protection Program (PPP)

Economic Injury Disaster Loan (EIDL) and Loan Advance

SBA Debt Relief

SBA Express Bridge Loan

The Paycheck Protection Program (PPP)

New SBA 7(a) loan program established through the CARES Act to incentivize small businesses to retain or rehire their employees. If used for approved purposes, the loan may be forgiven in part or in whole.

Unlike typical SBA Loans, the PPP Loans are unsecured and thus require no collateral, no personal guarantee, and waived the requirement to have sought credit elsewhere, making it much more accessible to small businesses negatively impacted by Covid-19.

Who is eligible for a PPP Loan?

A small business as defined by the SBA (businesses that have fewer than 500 employees (exceptions for hotels and restuarants exist among others) – you can check here https://www.sba.gov/size-standards/
Your business was in operation as of February 15, 2020
You’re either an independent contractor, sole-proprietor, or own a business that has employees or independent contractors for whom they have associated payroll costs

How much can you get with a PPP Loan?

Loan amounts are calculated based on 2.5 times your business’s average monthly payroll costs (up to 10 million), which include the sum of payments below:

Salary, wages, commissions, or similar compensations
Cash tips or equivalents
Vacation, parental, family, medical, or sick leave
Allowance for separation or dismissal
Group Healthcare benefits, including insurance premiums
Retirement benefits
State or local taxes on the compensation

IMPORTANT NOTE: Each employee is Capped at $100,000 annualized, such that if one of your employees (including you if you pay yourself a salary) made more than $150,000 last year or $12,500/month on average, you would have to bring that down to ~$8,333/month when calculating your loan amount. In other words the most you can request on your loan per employee is $20,833 or 2.5 times the monthly average of that employee’s payroll.

How can I have my PPP Loan fully forgiven?

In order to have your loan fully forgiven, you must use 100% of your funds on eligible costs within the first 8 weeks after receiving the funds from your loan.

At least 75% of loan proceeds must go towards covering payroll, and the remaining 25% of loan proceeds can be used to cover rent, utilities, and mortgage interest payments.

IMPORANT CHANGES: As of June 6, 2020 the PPP Flexibility Act has reduced the minimum payroll spend requirement from 75% to 60%, which leaves the remaining 40% towards covering rent, utilities, and mortgage interest payments. The 8 week PPP forgiveness period has also been extended to the earlier of either 24 weeks or December 31, 2020. These changes allow borrowers more flexibility and time on allocating the use of funds than were previously required.

How do layoffs affect Loan Forgiveness?

Loan forgiveness is designed to incentive businesses to retain or restore employees that were either laid off or furloughed.

If you have already laid off or furloughed employees due to the Coronavirus between 2/14/2020 and 4/26/2020, but rehire before 6/30/2020, then you can still have your loan forgiven.

This means either keeping your employees on staff or re-hiring them before 6/30/2020 and not “materially reduce” their salary, which has been defined as NOT reducing an employee’s pay beyond 25%

IMPORTANT CHANGES: As of June 6, 2020 the PPP Flexibility Act has extended the the 8 week PPP forgiveness period to the earlier of either 24 weeks from date of disbursement or December 31, 2020. You have the option to retain the 8 week forgiveness period if for example you already had a PPP Loan before.

How your Loan Forgiveness can be reduced

Let’s say that for whatever reason you decide to spend more than 25% of your loan on non-payroll costs.

For Example: After getting your $100,000 PPP loan, lets say you decide to spend $50,000 of the loan proceeds or 50% on payroll in the following 8 weeks and $40,000 or 40% on rent, which means you can have $75,000 forgiven (and pay interest on the $25,000 that you didn’t spend on payroll)

IMPORTANT UPDATE: As of June 6, 2020 the PPP Flexibility Act has been broadly interpreted to mean that failure to spend at least 60% of PPP loan proceeds on eligible payroll costs may result in a complete bar to forgiveness. Borrowers should continue to monitor SBA guidance, as the SBA is not precluded from imposing more stringent payroll requirements

What are the PPP loan terms if not forgiven?

Interest Rate: 1% fixed
Term: 2 years
Payments deferred for first 6 months
No pre-payment penalty

How do you apply for a PPP Loan?

Though the SBA administers this program, borrowers must apply through existing SBA-accredited lenders or through any federally insured depository institution (such as a bank), federally insured credit union, and Farm Credit System institution that is participating.

Important Note: If you have a good relationship with your bank, it is advisable to inquire with them if you haven’t already, given that banks were essentially prioritizing their own customers above outside applicants in the early stages.

What should you do if your bank is no longer accepting applications or you want alternatives to potentially increase the likelihood of your application being screened?

You can apply through our marketplace here at Liquidus Funding given we have SBA-accredited lenders in our network that can process your application online (should take roughly 20 minutes to complete).

What Documents do I need?

Proof of Payroll (IRS Form 941)
Voided business check
Driver’s License
Business Bank Statement

Key Points

Apply as soon as possible given that the funding is limited and being processed in a first-come first-serve basis.

Update: As of May 3, 2020 of the $310 billion made available for this program in the 2^nd round, over 50% or $175 billion has already been used up.

More small businesses are eligible to apply given the loosening of traditional criteria (regardless of your credit score, lack of collateral, and without requiring a personal guarantee)
Be sure to document your expenses and follow your lender’s guidelines, so you can apply for loan forgiveness.

Though the SBA administers the loan, it is technically the lender that funds the loan, forgives your loan by, and seeks reimbursement from the federal government

Economic Injury Disaster Loans and Emergency Advance

Important Changes:

No longer accepting new applications as of April 15, 2020 (one exception below)
Congress has permitted only agricultural companies to apply at this time given the limitations in funding availability and the high volume of applications it has already received
Advance Amount reduced to $1,000 per employee, with a cap of $10,000

These loans are the traditional disaster-relief SBA loans and therefore generally mean longer application cycles and more stringent requirements. U.S. small business owners economically impacted by the coronavirus outbreak can apply directly with the SBA for the Economic Injury Disaster Loan (EIDL) program for up to $2 million in working capital loans as well as up to a $10,000 advance within 3 days of applying.

The cash advance will be forgiven if spent on eligible business expenses, effectively making it a grant.

Key Points

Agricultural Companies are encouraged to apply and are the only type of business eligible to apply at this point in time

SBA Express Bridge Loan Pilot Program (EBL)

Authorizes SBA Express Lenders to provide SBA-guaranteed bridge loan financing for small businesses located in communities negatively impacted by declared disasters. As of 3/25/2020 the SBA expanded program eligibility to include small businesses nationwide for Covid-19.

This program was designed to expedite funds and bridge the gap while small businesses wait for long-term financing (such as SBA’s direct Disaster Loan Program)

Summary of terms:

Loan Amount: Up to $25,000
Term: Up to 7 years
Interest Rate: Up to 6.5% + Prime Rate (Fixed or Variable)

Who is Eligible for an EBL?

Have a preexisting relationship with SBA Express Lender on or before date of applicable disaster (3/13/2020 for Covid-19)
Been adversely impacted by Covid-19
credit not available elsewhere (from non-federal sources)
Credit Score matters
Unlike the EIDL or PPP, the lender will review your personal and business credit as is the case with SBA 7(a) loans, which means you can get denied for credit-related reasons

SBA Debt Relief

In an effort to assist with coronavirus debt relief efforts, the SBA will automatically pay 6 months of principal, interest, and any associated fees that borrowers owe for all 7(a), 504, and Microloans disbursed before 9/27/2020. In other words, this is another way the SBA is offering debt relief for homeowners and businesses affected by the pandemic.