Dissecting the small business loans in the CARES Act COVID-19 stimulus package
Editor's Note: This information should be used for background purposes only, since passage of these bills took place in early 2020. Significant changes to the program have been made; please consult your tax advisor.
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.
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.
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.”
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.
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.