Dissecting the small business loans in the CARES Act COVID-19 stimulus package

Michael PersingerApril 1st, 2020

Details of the small business loans included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by President Trump on Friday, are as aggressive as any government action ever taken, and that’s really saying something.

The more than $350 billion in forgivable Small Business Association loans are meant to cover up to 2.5 months of payroll, rent or mortgage interest and utilities for covered small businesses up to $10,000,000. That money could help thousands of small businesses, including those in the trades, survive.  The availability of those loans and the types of business that can qualify have been aggressively expanded, and traditional requirements have been loosened.  

» WEBINAR: Watch the video of our webinar with top legal and financial experts discussing the CARES Act.

Although concerns remain about how quickly money could be distributed, speed is essential for many. Treasury Secretary Steve Mnuchin says he expects the program to be up and running the first week of April and the application forms and information sheets from the Treasury are now available online.  Banks we’ve talked to suggest that their terms and online application portals are rolling out on a similar timetable, so, while it may be a few days before banks are ready to accept applications (and they will have their own additional requirements), there is no reason to delay in getting your application together.

The Basics:

  • Small Business Association “7(a)” loans are being called the Paycheck Protection Program and will be available through SBA-approved lenders (including nearly all national and many local banks).  It’s the bank’s money that’s being lent, but the federal government guarantees and set program terms mean that the process will be very similar across lenders.

  • These Paycheck Protection Loans are forgivable against payroll, rent or mortgage interest, and utilities during the crisis period, up to June 30, 2020, with the forgiveness amount scaling down proportionally if employee salaries are reduced or to the extent the workforce is reduced.  If you’ve already been forced to make some layoffs, don’t worry, you can rehire workers and ‘catch up’ on available loan forgiveness. 

  • Interest rates are capped at 4%, repayment doesn’t start for 6 months and collateral and personal guarantee requirements have been waived.  Also waived are the traditional SBA requirements for industry-specific business size caps and the rule that the business be unable to secure commercial credit elsewhere.

  • Payroll expenses above $100,000 for an individual employee cannot be forgiven, though total payroll figures for all employees can be considered in the sizing of the loan. 

No-brainer, right? Well, not exactly. To the extent not forgiven, the money is not a grant (though grants do exist in other portions of the bill). Generally, the money must be repaid.

Here’s what Barbara Corcoran, who’s part of ABC’s Shark Tank, told Good Morning America on Thursday about the loans and small business:

“If you’re going to save your business, it’s not going to be with a stimulus package. It’s going to be through hard work and making really tough decisions.

If you decide to take the stimulus package loan, which is very favorable to small business, you’re going to need to keep your employees on the payroll, whoever they are.

Rehire the people you’ve already let go, if you’ve already let go, and if you don’t, that loan is not going to be forgiven. You’re going to have to work like crazy to pay it back. 

I would think long and hard before taking any money if you’re not sure your business is going to (be able to) pay it back.”

There is another hill to climb, too: Gaining the trust of small business owners (defined in the CARES Act as those with fewer than 500 employees). 

“It is incredibly important that policymakers credibly convince business owners that these conditional loans will indeed be forgiven and that firms’ owners will be treated equitably,” said Stan Veuger, an economist at the conservative American Enterprise Institute, told the New York Times. But, he said, “I am skeptical that the size of the package is large enough to cover the entire shutdown-slowdown period.”

HVAC, electrical and plumbing companies, and others in the trades, have been deemed “essential businesses” in areas where “safer at home” orders have been enacted to stem the spread of the virus.  While some local laws and ordinances contradict these federal determinations, this is being slowly but surely ironed out nation-wide so that even if business slows and non-essential services such as tune-ups are curtailed, the home services industry can continue to operate, even if revenue is down.

ServiceTitan data released Friday shows that revenue among those using the all-in-one software for the trades has remained relatively stable so far. If that holds steady and you expect to hold onto employees anyway, a Paycheck Protection Program forgivable loan could make sense.

» See our write up on CARES Act, published separately.

If your company needs relief, the Paycheck Protection Program maybe the best, but it is not necessarily the only option.

The Paycheck Protection Program under the CARES Act is separate from the Small Business Administration’s Economic Injury Disaster Loan program, low-interest loans that must be paid back, available to qualifying businesses. 

Those working capital loans of up to $2 million are available now. Unlike the Paycheck Protection Program, these loans are disbursed directly by the SBA.  Apply online here. Be prepared to provide the following:

  • Tax Information Authorization (IRS Form 4506T), completed and signed by each principal or owner.

  • Recent federal income tax returns.

  • Personal Financial Statement (SBA Form 413).

  • Schedule of Liabilities listing all fixed debts (SBA Form 2202).

  • You may also need to provide profit and loss statements, recent tax returns, and balance sheets.  ServiceTitan is rolling out custom reports to help you gather required information quickly.

And while waiting for an answer on that program, the SBA also has authority to make advances up to $10,000 (which turn into forgivable grants if a loan doesn’t ultimately issue).  Further, the SBA Express Bridge Loan program offers up to $25,000 that would eventually be rolled into a larger Economic Injury Disaster Loan.

See our FAQ on the Economic Injury Disaster Loans, published separately.

If time pressures are forcing you to consider these loan programs but you’d prefer the forgivable Paycheck Protection Loans, don’t worry.  The CARES Act allows you refinance economic injury disaster loans into Paycheck Protection Program 7(a) loans, so you may ultimately be able to roll it over.

In addition, the American Bankers Association is maintaining an extensive list of other low-interest loans for small businesses. 

Of course, experts say you should exercise caution before taking on any type of loan. 

Michael Morton, a financial adviser with Morton Financial in Harvard, Mass., posed the following to Fortune magazine: 

“What will you do if you borrow some money to make it through a month, but your situation doesn’t change in a month and you need more? The worst thing you can do is risk your future for a short-term situation.”

Another option is a commercial line of credit, which commits business owners to only the amount of credit they use, not an entire loan amount.  Consult your bank representative to find out options that might be available to you there.

Resources for the trades

For the latest information on how the COVID-19 outbreak is impacting the trades, check out our Coronavirus blog, our Facebook group for customers and our Facebook group for the industry If you have story ideas or questions, you can email us. We’d love to tell your story about how you’re helping in your community or dealing with these uncertain times, or just help answer your questions.

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