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What the CARES Act means for you

April 13, 2020 – UPDATE FROM THE SMALL BUSINESS ADMINISTRATION:
Based on the popularity of the EIDL / Emergency Grant program, the SBA has released the following statement:

On March 29, 2020, following the passage of the CARES Act, the SBA provided small business owners and non-profits impacted by COVID-19 with the opportunity to obtain up to a $10,000 Advance on their Economic Injury Disaster Loan (EIDL). The Advance is available as part of the full EIDL application and will be transferred into the account you provide shortly after your application is submitted. To ensure that the greatest number of applicants can receive assistance during this challenging time, the amount of your Advance will be determined by the number of your pre-disaster (i.e., as of January 31, 2020) employees. The Advance will provide $1,000 per employee up to a maximum of $10,000.

This is obviously significantly less than the $10,000 first claimed. The SBA recommends looking into the PPP as well. The lower amount of the grant does not affect the actual loan, so we still recommend you apply for both EIDL and PPP programs. It does mean that EIDL will be mostly a loan, however it is a 30-year loan at 3.75%. The first payment will be deferred a year. The PPP Loan will be deferred 6 months, and what will not be forgiven will have to be paid off over the remainder of 18 months, at 1% interest.

Original post: (updated with latest information to avoid confusion)
On Friday, March 27, the U.S. House of Representatives passed the CARES Act, which was promptly signed by President Trump. After weeks of uncertainty over what kind of support would be available, we are starting to get a clear idea of the framework the U.S. government plans to use the next few months. The intent of the CARES Act is to keep people employed while businesses are suffering significant drops in revenue. Typically in these scenarios, the self-employed – or sole proprietors if you will – are overlooked. I am pleased to say that the CARES Act provides for them as well.

If you want to read the bill for yourself, look up House Bill H.R. 748. The applicable sections are 1102: Paycheck Protection Program, Section 1106: Loan Forgiveness and Section 1110: Emergency EIDL Grants.

Payment Protection Program
Let’s start with the Payment Protection Program. The simplest way to summarize the framework is this:

  • The government will guarantee loans made by local banks.
  • The amount of the loan is determined by your average monthly “payroll” times 2.5.
  • The majority of a loan will be forgiven by the time the first payment is due.
  • The amount of loan forgiveness is based on what you will spend on “payroll,” rent, utilities, and mortgage interest for the eight-week (8) period after the loan starts.

“Payroll” means both your typical payroll, or, if you are a sole proprietor, your average monthly net income. This simple framework means that if you have a small business or a sole proprietorship, it should be very straightforward to go your local bank and apply for this loan, and get approved. Typically, it is very hard to get approved for these types of loans, but, in this case, the only requirements are that:

  • You were in operation on February 15, 2020.
  • You had employees for whom you paid “payroll” and taxes, or paid independent contractors, as reported on Form 1099-MISC.

If you don’t run payroll, you need to determine your average monthly net income earnings from your Schedule C (maximum $100,000), and then multiply that by 2.5. That means if you had a net income of $50,000 for 2018 or 2019, you should be able to get a loan for approximately:

($50,000 / 12) * 2.5 = $10,416.

You can then use this loan for any of the following:

  • Payroll costs.
  • Health insurance.
  • Mortgage interest for your business.
  • Rent for your business.
  • Utilities.
  • Interest on any debt obligation incurred from February 15 to June 30, 2020.

So you cannot use this loan to go buy the latest MacBook or any other nonessential items for your business.

The other good thing about these loans is that they do not need to be personally guaranteed, nor is any collateral required. By spending it wisely, you should be able to get the full, or close to the full, amount forgiven. The remainder will be a 2-year loan, at an interest rate of 1% percent.

The Small Business Administration (SBA) will soon release more details on how to apply for the loans and which banks will participate. The loans are expected to be available by Friday, April 3. In the meantime, it is important to get your paperwork together. Almost all regular banks are expected to participate, so it can’t hurt to reach out to your bank now and ask for the right contact. That way, you can be among the first to apply. I do expect there will be a rush in businesses applying for this. Because it goes through locals banks, the processing times should be limited, but you never know. As the saying goes, the early bird gets the worm.

Emergency EIDL Grants
If you are a sole proprietor with a negative net income and thus cannot apply for the PPP Loan, there’s still some other good news. That’s where the Emergency EIDL Grants come in. These grants are provided directly by the Small Business Administration. Basically the steps are:

1. Fill out the Loan application online at covid19relief.sba.gov.
2. If approved, you can receive $1,000 in your bank account as a grant plus an additional amount as a 30-year loan.

This loan will be approved/denied based on your personal credit score. Like the Payment Protection Program, you will be able to use this $1,000 for Payroll costs, Health insurance, etc. This $1,000 grant will be forgiven. Note that if you have employees, you can get up $1,000 per employee up to $10,000. The employee count is determined as of January 31, 2020.

You can even apply for both the EIDL and the Payment Protection Program. However, you cannot double dip. The $1,000 will be deducted from the forgiveness of the loan of the Payment Protection Program. Depending on your situation, this may still be a smart idea as the loan under the Payment Protection Program is 2 years and low interest. It’s the best business loan you would ever get, and the combined money should give you enough to bridge the gap. The EIDL loan is for 30 years at an interest rate of 3.75%.

Unemployment Insurance
If neither of the programs work out for you, or these amounts do run out, you can apply for unemployment through Section 2102: Pandemic Unemployment Assistance allows self-employed people to apply for unemployment insurance. This should get you half of the average amount of your state’s unemployment program, plus $600 a week. While this is not a huge amount, every little bit can help. More information on this can be found through your state’s Unemployment Insurance programs.

With this pandemic, things seem to be changing on an hourly basis. While the above programs are certainly not perfect, it is a good start in providing much-needed support for sole proprietors, small businesses, and the employees of small businesses. I expect there may be additional stimulus provided as the total economic damage of this pandemic becomes clear. Hopefully, these measures will be enough to keep your business afloat for the time being, and take away some financial anxiety.

I firmly believe that if you had a great business before this, you will have a great business again after this. If you were struggling, this is as good a time as any to take a hard look at your business and see where you need to improve. To help with that, 17hats is offering a free 30-day Business Makeover challenge, which is open to all business owners, whether you are a 17hats member or not.

Business owners are scrappy by nature, so we will fight this together. Please stay safe and healthy, and follow all CDC and state guidelines.

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