The Coronavirus Aid, Relief, and Economic Security (CARES) Act has passed. What does this mean for you? With so much information out there, we wanted to gather all the important details in one place to help answer all your questions about the CARES Act.
WHAT IS THE CARES ACT?
The Coronavirus Aid, Relief, and Economic Security Act (CARES) is the most substantial economic relief bill in U.S. history. It will allocate $2.2 trillion to support individuals and businesses affected by the pandemic and economic downturn.
WHAT SHOULD SMALL FOOD BUSINESSES DO IMMEDIATELY?
1. Every business should immediately contact their banker(s). The expanded SBA Section 7(a) Loans—often referred to as the “Paycheck Protection Program”—is being administered by banks and other financial institutions, so you’ll need to reach out to them in order to be eligible to receive the loan.
2. Evaluate with your banker and financial advisors whether you qualify for expanded SBA Section 7(a) and/or EIDL loans (see information below on each).
3. Gather all your company documents that will be needed for the loans. This includes certificates or articles of incorporation, bylaws, operating agreements, and certificates of good standing. In addition, make sure you have all financial information that borrowers would ordinarily expect a lender to want to review, including financial statements, tax returns, and payroll information.
WHAT IS THE PAYCHECK PROTECTION PROGRAM?
One of the biggest lifeboats that the CARES Act offers to small businesses is the Paycheck Protection Program, which consists of $350 billion in government-backed loans to assist companies in maintaining their payrolls through June 2020. Eligible companies can apply to borrow up to 2.5 times their average eligible monthly payroll costs with the loan having a two-year term and interest rate of just 1% (see how loan amounts are calculated below). Depending on how much a business borrows and if the funds are allocated and used correctly, all or a portion of the loan will be forgiven.
DO YOU NEED TO SHOW THAT YOU HAVE LOST LARGE SUMS OF REVENUE TO QUALIFY?
The answer is no. There are three things you need to state to prove you qualify:
1. The current uncertain state of the economy makes the loan necessary to support the ongoing operations of your business.
2. The fund will be used only for intended purposes: 75% going to payroll and only 25% of the loan going to non-payroll operational costs.
3. Confirm that all information provided in the application is accurate and acknowledgement that providing falsified information could result in imprisonment and a fine.
HOW DO I CALCULATE THE MAXIMUM PPP LOAN FOR MY BUSINESS?
Amount of Average Monthly Payroll Costs x 2.5
There are three approaches to measuring the Average Monthly Payroll Costs, and they are based on when your business was operational:
1. If you were operating between February 15, 2019, through June 30, 2019: Your loan amount is generated by finding the average monthly payroll cost incurred during the year before the loan date (12 months) and multiplying it by 2.5.
2. If you were not operating between February 15, 2019, and June 30, 2019: Your maximum loan amount is calculating by averaging your monthly payroll costs from January 1, 2020, and February 29, 2020, and then multiplying by 2.5.
3. Did you already take out an Economic Injury Disaster Loan (EIDL) between January 31, 2020, and April 3, 2020? You can refinance this loan into a PPP loan by adding the outstanding loan amount to the payroll sum.
ARE YOU ELIGIBLE?
1. If you are eligible for a 7(a) loan, then you are eligible for the PPP loan.
2. If you are considered a nonprofit (501(c)(3)), Veteran’s organization (501(c)(19)), or a tribal business that does not employ more than 500 employees (including full-time, part-time and seasonal workers) then you are eligible. Restaurants with multiple locations may be eligible to submit separately for each location.
3. If you are a sole proprietor, independent contractor, or self-employed, you are also eligible.
* In all cases, contact your bank to confirm eligibility
HOW CAN YOU USE AND ALLOCATE THE MONEY RECEIVED FROM THE LOAN?
The primary reason for the loan is to be able to continue to pay your employees. Thus 75% of the money needs to be used for payroll costs, which includes retirement benefits, state and local taxes, sick pay, vacation, family leave, and contributions to health care plans. The payroll portion does not include compensations for any employee who makes over $100,000 (these employees will be counted and capped at $100,000), employee salaries whose primary residence is outside of the US, payment to contractors (they can apply to PPP separately), employers’ portion of FICA, and taxes withheld or paid by the company for income tax.
You may be wondering if you are included in the payroll costs. If you, the owner, receives a W2, then yes, but if you purely receive profits, then you are not included.
HOW DO I CALCULATE LOAN FORGIVENESS FOR PPP?
The full amount of the loan and interest incurred may be forgiven if, during the eight weeks (covered period) following the loan origination date, you use at least 75% of the loan for payroll cost and the remaining amount to pay interest on mortgages, rent payments for leases, or utility payments for services that were incurred before February 15, 2020.
The loan forgiveness amount will be decreased if the employer decreases their headcount or employees’ compensation has been increased by more than 25% compared to the prior quarter. If layoffs have already taken place, these forgiveness reductions can be eliminated if the employer rehired and reverses bay deductions before June 30, 2020. You are also not required to rehire the same individuals, but need to have the same headcount.
WHAT IS THE ECONOMIC INJURY DISASTER LOAN PROGRAM (EIDL)?
The EIDL is a low-interest federal loan that is available for people experiencing an economic injury at a fixed interest rate of 3.75% for a term of no longer than 30 years.
WHO IS ELIGIBLE FOR THE EIDL?
Any small business that has lost revenue, had to shut down, lay off workers, or lost supply chain due to the ongoing COVID-19 crisis is eligible.
DOES THE EIDL HAVE A FORGIVENESS PROGRAM?
No, it does not, but it does have an emergency $10,000 grant that can be received within three days of submitting the application. This is helpful if you have any urgent pending payments, as other programs like PPP may take a few weeks to go into effect.
To qualify for the emergency grant, you are required to:
• Be eligible for the EIDL
• Been operating since January 31, 2020
• Use the grant to maintain payroll, pay sick leave, meet increased supply chain costs as a result of COVID-19, or pay rent or mortgage
The grant does not need to be repaid if you are not accepted into the EIDL, but will be subtracted from the PPP loan forgiveness.
That was a lot of information! The most important thing to take away is to talk to your bank and financial managers now to determine if this is the fund for you. Regardless if you apply for the CARES Act, it’s vital to make sure you have all business documents in order, as new initiatives and funds could come through the pipeline any day.
Authored By: Samantha Pann, Marketing Specialist Off the Grid