The COVID-19 pandemic is creating significant issues for small businesses in the US and around the world. The economic impact, uncertainty, and major issues with revenue and cash flow have led to the US government authorizing a $2 trillion stimulus package (the CARES Act) to help individuals, SMEs, and corporations. Part of the CARES Act puts aside almost $400 billion in emergency funding for small businesses.
If you run a business, it’s important to understand what financial benefits you’re entitled to under these new arrangements. We’ll break down how you can get money through the federal stimulus package to help your business survive and a checklist to see if you qualify.
Two Types of Emergency Disaster Loans Your Small Business Might be Eligible For
At present, there are two main types of loans that are designed to help businesses as a result of the pandemic, under the oversight of the Small Business Administration (SBA). They are:
- The Paycheck Protection Program (PPP): Allows businesses to access significant amounts of emergency funding so that they do not need to layoff workers, or they can rehire those that have been laid off. Learn more and fill out a pre-application for PPP.
- The Economic Injury Disaster Loan Program (EIDL): Provides a combination of a cash grant and a loan that can be used for many types of business expenses.
We’ll explain each in more detail, including eligibility, requirements, loan amounts, and loan forgiveness.
The Paycheck Protection Program: Eligibility and Requirements
The PPP loan initiative has been open for applications since April 3, 2020.
PPP Eligibility Requirements
- Your small business or nonprofit must have 500 or fewer employees. Including full-time, part-time, and other staff.
- Other businesses that qualify as per the rules of the Small Business Administration can apply for a PPP loan.
- Individuals who are sole proprietors, independent contractors, or who are otherwise self-employed can apply for PPP.
- Tribal businesses and veteran organizations can also apply.
- Franchise businesses may or may not be eligible.
- The PPP loan is mainly intended to provide funding for payroll costs.
Applying for the PPP Loan
- You will need to apply for the loan through an SBA-approved lender, which includes most national and many local banks.
- The SBA provides a tool that lets you locate local lenders that can make this loan.
On the PPP application form you will need to list:
- Average monthly payroll for employees for a 12-month period
- 2.5 times your average monthly payroll
- Number of employees
- Purpose of the loan
- Names, titles, tax numbers, ownership percentages, and addresses of all owners who own 20 percent or more of the business
- If the US is the principal place of residence for your employees.
- Various questions about whether you are ineligible to run a business, about whether you are delinquent on loans, if you have any indictments, and other details.
- Your lender will likely ask for other documentation including proof of payroll amounts and other business financial documents.
PPP Loan Amounts
The maximum amount that you can be lent is equivalent to 2.5 times the average monthly payments to employees over the 12 months before applying for the loan. Let’s break that down.
- You have seven employees and you apply for the loan on April 30, 2020.
- Your average pay to each employee per year is $45,000.
- Your total monthly payroll costs for those seven employees is $26,000.
- You can apply for a loan of up to 2.5 times the average monthly amount, so 2.5 times $26,000 is around $66,000.
PPP Loan Forgiveness
The best news about the PPP loan is that it is completely forgivable (you don’t have to repay it) if you do not lay off any employees, or you rehire any that you have laid off. Please note that this information is correct as of April 2020. PPP loan requirements may change over time, so always check the latest updates.
The Economic Injury Disaster Loan Program: Eligibility and Requirements
The EIDL has been in place since late March 2020.
EIDL Eligibility Requirements
- You must have been operational and in business as of January 31, 2020.
- The EIDL applies to small businesses, nonprofits, tribal businesses, cooperatives, and employee-owned businesses.
- Your business must have 500 or fewer employees.
- You must have experienced negative economic effects as a result of the coronavirus crisis.
- Sole proprietorships and independent contractors are also covered.
- The EIDL can be used to pay for any reasonable business activities and costs, not just payroll.
- You should receive the money within three days of the application being reviewed by the SBA.
Applying for the EIDL Program
- You apply for EIDL directly through the SBA website.
On the EIDL application form you will need to list:
- Answers to various questions about illegal activities, child support delinquency, business activities, and various other questions
- Business identification including name, address, tax identification, and type of organization or legal business entity
- Gross revenue for the 12 months to January 31, 2020
- Cost of goods sold for the 12 months to January 31, 2020
- Other income and compensation paid to the business
- Business activities.
- Number of employees
EIDL Loan Amounts
The SBA and lenders have not released information on how they calculate loan amounts to eligible small businesses. The maximum amount available through EIDL is $2 million.
EIDL Loan Forgiveness
The first $10,000 you receive through EIDL is completely forgivable, and you do not need to repay it. Any remaining amounts will have interest charged, but this will be at a low rate, typically around 3.75 percent. Businesses can repay the loan over terms of up to 30 years.
Important Information About Emergency Disaster Loans and Funding for Small Businesses
Here are some important notes before we go:
- You can apply for both an EIDL and a PPP loan
- You cannot use both loans for the same purpose at the same time
- Taking out one of these loans may impact on loan forgiveness for the other loan, check with your lender
- Both of these programs have proven extremely popular, meaning delays in the review time of applications or contacting the SBA or lenders for further information
- It’s best to apply for these loans as soon as possible, as both have a set amount of total money that they can lend out
Keep in mind: the information we are sharing today is based on our understanding as of early April 2020. New government rules, regulations, and future stimulus packages may change eligibility and loan amounts. Additionally, we are not covering state, local, or other loans that may be available to support small businesses during the 2020 coronavirus crisis. Please do not take the information in this post as financial advice.
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