Small businesses have emergency funding options in face of COVID-19
Facing an unprecedented situation during the COVID-19 pandemic, small businesses are having to make some tough choices on how to stay afloat.
For businesses not deemed essential, what happens during weeks or perhaps months without revenue?
Even for those remaining open, do they (or can they) do so at full staff and full service? What does partial service look like? How are potential employee cuts or furloughs handled?
Fortunately for small businesses, a number of solutions are available at the local level and beyond. Some of the programs are as a result of the recent Coronavirus Aid, Relief and Economic Security (CARES) Act, though some were already in existence.
A brief summary of some of the solutions is provided below.
USDA RBEG Program
The Greencastle/Putnam County Development Center has funds available to loan out to small businesses affected by the COVID-19. These loans are for Putnam County businesses only through a grant from the USDA RBEG Program.
Loans will be considered for small businesses (any business with less than 50 employees) that have immediate cash flow concerns.
Any business owner who believes they may be eligible should contact the Development Center for an application. Loans up to $2,500 will be considered, with an interest rate of 3 percent and loan term to be determined on case-by-case basis.
Contact Development Center Director Kristin Clary at firstname.lastname@example.org or 653-2474 for more information.
Economic Injury Disaster Loan
The SBA Economic Injury Disaster Loan (EIDL) has been around for some time for disaster situations. Eligibility requirements include the following:
• The business must be located in a disaster area. Indiana has been declared a disaster area due to coronavirus.
• The business must have fewer than 500 employees.
• The business has experienced substantial economic injury.
Eligibility is usually also restricted to businesses that cannot get credit elsewhere. However, this criterion has been lifted for coronavirus disaster areas.
Under the EIDL, businesses have to go through underwriting to evaluate their credit history, financials and tax filings. There are some limits on how EIDL funds may be used. The program is designed to help pay bills and not to refinance or pay distributions.
The loans have a low interest rate — currently 3.75 percent — and the SBA will work with businesses to determine a payback period, based on their ability to repay. Loan amounts are determined by a business’s need for capital.
The loan comes directly from the U.S. government and the loan program is not expected to include a forgiveness component.
However, as part of the EIDL and a rider to the stimulus package, businesses that apply for the EIDL would also get a $10,000 grant to be paid within three days of application.
The EIDL grant does not need to be repaid, even if the grantee is subsequently denied an EIDL, and may be used to provide paid sick leave to employees, maintaining payroll, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments. Eligible grant recipients must have been in operation on Jan. 31, 2020. The grant is available to small businesses, private nonprofits, sole proprietors and independent contractors, tribal businesses, as well as cooperatives and employee-owned businesses.
EIDL must be applied for directly through the SBA website at http://sba.gov/disaster.
Paycheck Protection Program
The Paycheck Protection Program (PPP) is part of the CARES Act.
Loaned funds are intended to be used to pay payroll, benefits, rent, mortgage loan interest and other bills. It will not require a personal guarantee, and the interest rate would not exceed 4 percent.
Business are not permitted to borrow funds from the PPP and EIDL for the same purpose.
One key difference in the two programs is PPP must be applied for through an SBA-approved bank, not the SBA itself.
The PPP loan amount could be up to 250 percent of a business’s average monthly payroll over the last 12 months. A portion of the loan would be eligible for forgiveness based on the amount used for payroll, rent, mortgage interest,and utilities in the eight-week period immediately after the loan origination date.
However, the forgiveness would be reduced proportionately by a decrease in employee headcount and employee pay level compared to prior periods.
Businesses that have terminated employees or otherwise reduced their headcount would need to rehire before June 30 for those individuals to be included in the headcount.
To qualify for loan forgiveness, businesses will need lots of documentation.
With the CARES Act only recently passed, PPP funding is unlikely to occur quickly. Regulations must still be written and banks have to be educated and create their own processes.
Only then will the application and underwriting process begin. Many applicants will no doubt get in line for funding, slowing the process further.
Employee Retention Credits
The Employee Retention Credit are for businesses ordered to fully or partially suspend operations by the government. The tax credit is an incentive during the closure and ramp-up/recovery period.
Businesses that receive a PPP loan do not qualify for this credit.
The credit will be equal to 50 percent of qualified wages, where qualified wages are capped at $10,000, so effectively a max credit of $5,000 per employee. The credit can be claimed against payroll taxes, and to the extent it exceeds payroll taxes for a quarter, the difference will be refunded.
The credit will be allowed to continue for the business each quarter until one quarter after it exceeds 80 percent of its pre-suspended revenue levels in a previous comparable period.