CARES Act Explained: How To Apply, What To Apply For First, FAQs
For small businesses dealing with the financial consequences of the worldwide COVID-19 pandemic, the nation’s CARES Act includes two separate and distinct relief plans. One or both could help your company bridge the financial gap.
Mike Lousteau, General Counsel for ServiceTitan, joined a webinar hosted by ServiceTitan on April 2 to explain the differences, the nuance, and the probable plan of attack for the trades. This article includes a recap of the webinar but also includes important updates based on the most recent published guidance.
At the heart of Lousteau’s advice: Apply now, and there’s one program you should apply for first.
First, the distinctions.
The Paycheck Protection Program is, as the name suggests, meant to keep employees on a company’s payroll during the Coronavirus pandemic.
For those who own businesses with fewer than 500 employees, it is preferable for a number of reasons: It’s a bigger pool of money, encompassing about $350 billion of the $2 trillion package (recent discussions suggest a further $250B may be on the way); it covers payroll expenses for both full- and part-time employees, plus other prescribed expenses; and the loan will be mostly forgiven if certain criteria are met by the business.
The loan amount can be up to $10 million and is determined by your calculation of the MONTHLY total, multiplied by 2.5, of the following:
Payroll, including salary, wages, commissions, tips, vacation, medical sick leave, dismissal or separation benefits, and group healthcare benefits.
Rent, or mortgage interest (but not principal).
(The 2.5 multiplier is intended to represent eight weeks of payroll plus 25 percent for those other expenses.)
“If you use the loan for those things, the loan will be forgiven for the amount you spend on those things,” Lousteau said. Certain conditions and limitations will apply, though, including penalties for reducing your FTE count and decreasing compensation more than 25 percent.
The pool is limited, and not all the details are worked out, but Congress has provided enough guidance for businesses to move forward getting their applications and materials together.
Because of the limited funds, it’s important to apply quickly. “The money very likely will run out,” Lousteau said. “Like I tell my kids, be ready to order when the waitress comes to the table.” Fortunately, Congress may increase the funds available due to the overwhelming demand.
The intent of the PPP is to keep money flowing to employees.
“It’s basically a backdoor unemployment system,” Lousteau said. “You have a lot of people who are sitting home not working — not in your case (as essential businesses) but in other industries. They are saying, ‘we can’t possibly funnel the money to these people fast enough. You keep them on your payroll and we’ll pay you back.’”
The Economic Injury Disaster Loan, on the other hand, is meant to benefit companies harmed financially by the Coronavirus outbreak. This existing program has $10 billion in new funding to address losses to your business — the loss of a big installation contract or a dip in business because customers don’t want workers in their house, for instance — of up to $2 million because of COVID-19.
The loans are repayable at a maximum interest rate of 4 percent, payments can be deferred for up to four years, and they can be stretched over 30 years.
“It’s a whole different set of math,” Lousteau said. “You tell (the Small Business Association) your situation and they come up with a loss calculation and make you a loan.”
The PPP will be administered through your local bank, with most sizable banks including virtually all the national banks participating, while the EIDL program is run directly by the Small Business Association (SBA).
A business could very well be eligible for both programs, under certain circumstances, but one is clearly preferable, especially for those in the trades. Their businesses have been deemed essential and can continue to operate but clearly qualify for PPP.
“These programs are interjoined in that you cannot cover the same ‘loss’ with both. You can’t double-dip on the PPP,” Lousteau said. While guidance at the time of the webinar was somewhat conflicted, it became clearer after the fact, and there is no reason to delay in applying for both if you have separate grounds.
“It’s worth asking yourself this question: Do I have a separate economic injury separate from what has been compensated with this (forgivable) payroll loan? And is it worth looking at (EIDL)?”
Here are the other key takeaways, plus some frequently asked questions, from the webinar, which was attended by more than 1,300 people:
1. Use your current banker.
Now is not the time to be shopping for a new banker, which would require separate onboarding and will only slow the process. “That probably makes it more difficult to get these funds if you are eligible,” Hunter Nadler, Executive Director of Technology and Disruptive Markets at J.P. Morgan, told the webinar audience. “The best thing to do is talk to your existing banker. They are best positioned to provide the service.”
Since the webinar, more national financial institutions have started processing applications, though some are doing more volume than others. If you feel you are stuck, consider a different bank or a lending agent.
If you are not able to find success through your current financial institutions, or are looking for an alternative, our partner, BlueVine, is ready to support your business with funding through the program. You can apply online and see if you qualify in minutes — Apply Here.
You may also visit www.sba.gov for a list of qualified lenders.
2. Talk to your lawyer and your accountant, too.
There is nuance to the program, so consulting the people you normally would before making a big financial move is prudent. “That’s the most logical course of action,” Alton McDowell, co-head of Technology for Middle Markets at JP Morgan, told webinar attendees.
3. Get ready to fill out our PPP application today.
The Treasury Department hoped to start rolling out the application process on Friday, but none of the national banks are ready to take applications yet. The reality is that it could take another week or so, Lousteau said. But that doesn’t mean you should dally. A sample application is available, so that’s a great place to start — today.
“It’s a two-page sample application that the Treasury put out,” Lousteau said. “It is the easiest loan application that you’ve ever seen in your entire life.”
4. Don’t assume that two-page application is all you’ll need.
The bank will ultimately disburse your loan, and underwriters are likely to want more than the application. “That’s the Treasury’s application and not the bank’s application, and they’re the ones lending,” Lousteau said. “It’s guaranteed by the Federal Government so they should be really willing to throw the money out, but they are going to have questions.”
Start gathering your company’s financial information, including:
2019 and 2020 Balance Sheet and P&L
“Payroll” calculations, all-inclusive, by employee
Employee counts by location, RIF information/plan
Lease/Mortgage and Utility costs
Ownership information, “not because there’s a personal guarantee,” Lousteau said, “but if it’s a fraudulent application or the numbers are made up or you don’t really run a business, they’re gonna know who to call.”
5. Only apply once, not duplicates across multiple banks.
There’s no advantage to applying at more than one financial institution, and having multiple active applications could cause problems for your company.
6. You have a choice for the date of your headcount.
Companies can choose one of two dates for the purposes of determining FTE count — Feb. 15, or the origination date on the PPP loan. If there has already been a reduction in force, employees can be rehired, included in the headcount and paid as part of the program.
“You can pick which date you want to start on,” Lousteau said. “It’s advantageous in that sense. If you have already terminated someone, they are not going to count against the forgiveness if you get a loan next week.”
7. Once you get an answer on your PPP application, consider EIDL separately.
If you have a separate economic injury that hasn’t been compensated with the payroll loan, apply for an EIDL loan from the SBA.
Q&A: Frequently asked questions
If employees a company didn’t want to lose were laid off so they could get unemployment benefits, what’s the best move now?
If you rehire them before June 30, their salary counts for forgiveness. “The act is very specifically designed to say, ‘hire those people back, put them on your payroll and we will pay the payroll for those people,’” Lousteau said. “And to the extent that you let them go before you got the loan it’s OK, it’s not going to count against you.”
What if there isn’t work for employees to do?
Doing a lot of training would be a great way to spend the time. If you are approved for the PPP, you’ll have money to pay them. The government’s goal is for people to keep being paid so that the economy keeps running. At minimum, you have time for training and to find other ways to set yourself up for future success.
Why shouldn’t a company apply for the EIDL first?
Only you can decide what’s right for your business, and there is a lot of uncertainty about how the programs will run (and how long money will last), but our thought is that the PPP should come first.
Three reasons: The amount of the money in the fund is much smaller; the loan is not forgivable; and you can come back to the EIDL, under certain circumstances, if the PPP is denied. Traditional underwriting is a number of weeks on EIDL loans, but it’s really not clear if it will be faster or slower during this time. Still, with a maximum fixed rate of 4 percent, deferral for up to four years and up to a 30-year term, it’s not a bad deal for many business owners. And no collateral is required for amounts up to $200,000.
What’s required for an EIDL that isn’t necessary for the PPP?
For an EIDL, you have to prove economic injury caused by the Coronavirus outbreak. “That’s a whole different set of math,” Lousteau said. The loss could be a specific contract that fell through, a general drop in business caused by a “safer-at-home” order, or something else that can be directly tied to the outbreak. That said, there is not clear guidance from the Treasury (or elsewhere).
Anything else to know about the EIDL?
Yes. The SBA, at its discretion, can provide an advance of up to $10,000 within “three business days” to help a distressed company. If the loan is subsequently denied, that $10,000 turns into a grant that doesn’t have to be repaid. We have concerns, however, that this three day period is not able to be sustained at the expected application volume.
Why shouldn’t a company apply for the PPP and EIDL subsequently?
The Treasury hasn’t given clear guidance on how to differentiate the purposes of the loans, and we have concerns that applying for both might “muddy” your PPP applications and push you to the back of the line for the PPP, but the most recent revisions of the sample application seem to have drawn a clearer line that an EIDL application doesn’t need to be flagged on a PPP application.
Once a company has been approved (or denied) for PPP, can it apply for EIDL?
Nothing precludes getting it for a different loss, so we believe that both should be available (subject to funds remaining). We recommend a business owner apply for the PPP first, and once a determination is made on that forgivable loan, ask themselves, “Do you have a separate economic injury?” If the answer is yes, consider applying for the EIDL.
How long does the headcount have to stay the same for the PPP to be forgiven?
The term of the program is Feb. 15, 2020, to June 30, 2020, so all things being equal it’s best not to fire employees before June 30. “It’s not about doing thoughtful performance reviews, it’s about keeping money in people’s pockets,” Lousteau said. “‘Don’t fire people before June 30’ is basically the message from the Treasury.”
Remember, however, that if you had to let someone go for cause before that date, only the unpaid portion of the payroll for that person would not be forgiven, and you would be able to repay that portion because you didn’t use the money to pay the employee.
“If you’ve got to get somebody out of your organization, I wouldn’t let the tail wag the dog,” Lousteau said. “Let that person go.”
Does what a company pays subcontractors count toward payroll and expenses?
No. The subcontractor would need to get their own PPP loan for their employees.
What about employees who make more than $100,000?
Highly-paid employees get limited forgiveness, but you can only include up to $100,000 in your PPP calculation. If you compensate them above that level, it is your company’s responsibility.
What about owners? Does their salary qualify for PPP relief?
Owners who are on the payroll and get a W-2 can get PPP with respect to their compensation, but in the calculation and in the forgiveness, only the first $100,000 per year of their salary can be claimed.
What about an S-Corp passthrough or LLC for owners? How does that work?
In an S-Corp, owners are required to take a reasonable salary, so that salary is included (exclusive of draws) in the payroll calculation amount. In LLCs or other structures where the owner takes no salary but is taxable at year end for the net income of the business, the net income attributable to that owner is that owner’s ‘payroll’ for these purposes. In all instances, the $100,000 annualized rate applies.
How will the application for forgiveness work?
The details haven’t been worked out and the process isn’t set, but two things are clear. First, the law is explicit on forgiveness, and there are formulas in the law. Second, the forgiveness process will be administered by your lender (you will send records to them in some prescribed format, they’ll forgive the loan and get paid by the Treasury).
“I would not stay up at night worrying that the forgiveness will be canceled,” Lousteau said. “But you want to have good, complete records (on qualified expenses) to show your lender.”
ServiceTitan software will help with recordkeeping.
What if I have to lay people off before June 30?
Business owners would have to pay back a portion of the forgivable loan, including interest rate set by Congress.
What if employees have already been laid off? Should they be rehired?
Since businesses can pick between Feb. 15 and the date of origination of the loan, the right move is whatever gives you the better answer. But the government incentivizes business owners to hire those separated employees back by covering the payroll costs.
What if an employee quits?
The amount of forgiveness would be reduced, but again, you’re also not paying that person. You can pay back the amount of relief you received for their salary back, plus the low interest.
Can a company go from paying 50 percent of healthcare to 100 percent and get forgiveness?
You can do whatever you want, of course, but the amount of the loan will be based on your historic practices so this would be money out of your pocket.
Is a Workers Compensation insurance premium part of payroll cost?
“They are not in any list that I have seen,” Lousteau said.
Resources for the trades
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