A second wave of funding, now called the Paycheck Protection Program and Health Care Enhancement Act, has been signed into law. This new funding of $484 billion will allocate an additional $310 billion to the PPP, $60 billion to the EIDL, and $100 billion to fund hospitals and coronavirus testing sites. With many moving parts and new questions, SBA mentors and bank officers weigh in on what business owners should know to maximize their benefits on the new funding, as well as the first bill, which is called the CARES Act.
“The two loan programs, the Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP) are really the cornerstones, as far as small business is concerned,” says Suzanne McGrath, a SCORE mentor from the Washington, D.C. chapter. “It’s important for everybody to also realize that the CARES Act includes other programs that involve tax credits, and by looking at each aspect of the act, you can maximize the way your business can benefit from it because it goes beyond those direct loan programs.”
In addition to small business owners, “if you fall into any of the categories of being self-employed, a consultant, 1099 contractor, gig worker or a single-member LLC, you also qualify for both the EIDL and the PPP loans,” says Frank LaMonaca, a SCORE mentor in Westerly, Rhode Island.
“Whether it’s the PPP or EIDL that you’re planning to apply for, you need to have all the information ready to file,” says McGrath. “So, if you want the PPP, make sure to contact the bank you’re going to use and make sure that you understand their application process. You can go ahead and download the application online.” Click here for more detailed information about the PPP.
Something else to consider: “Keep in mind that for the PPP, all the funds must be used within the eight-week period, or what we call the covered period from the day they were dispersed to your business,” says Matt Vondersaar, first vice president and senior credit supervisor at East West Bank. “The borrower should really try and use all of the PPP loan toward eligible expenses to get a dollar-for-dollar forgiveness with the right documentation.”
For the EIDL, here’s what the application looks like from the SBA site, so business owners can get documents ready ahead of time. “You need to make sure you’re at the starting line, ready to move as soon as the program funding opens up again,” says McGrath.
The formula used to calculate the loan amount depends on which loan you’re applying for. To qualify for the SBA EIDL program, you must have been in business as of January 31, 2020. The EIDL can provide up to $2 million in financial assistance to small businesses or private, nonprofit organizations that have suffered significant economic injury as a result of a declared disaster. The loan comes directly from the SBA and the application can be found directly on the SBA website.
“The way you would calculate the loan amount would be to ask yourself how much your gross revenues are for six months. Then, calculate how much your cost of goods sold is over that six-month average. The maximum loan amount that you would take out would be the difference between those two numbers, which is your gross profit,” says McGrath. To put it simply, the formula to calculate your ideal loan amount would be revenue minus the cost of goods sold over time.
“Calculating for the PPP is a bit different,” says McGrath. “That calculation should really be based on payroll.” To find the formula on PPP loan calculations, click here. McGrath also encourages business owners to share their PPP formula with an accountant or someone from the bank.
Because of the effects of the novel coronavirus, lenders are considering the circumstances that may have impacted a business’s or a business owner’s credit score. “If the business has had a very good track record in the past years, and this is a hiccup due to the coronavirus, I think there are ways in the SBA rules for you to still qualify,” says Wai-Chun Li, senior vice president and manager of the SBA lending department at East West Bank.
“Be prepared, though, because my understanding is that when you speak to a lending agent, they will ask about your credit rating history and ask questions about sustainability,” says LaMonaca. “If things weren’t going well even before this pandemic, there’s reevaluation needed for the business plan. Lenders will want to know of your expense and revenue projections, marketing position and competitive analysis.”
While each state has its own relief programs outside of the federal CARES Act, eligibility to apply for local and federal programs depends on your state’s mandate. “One of the keys to getting to the other side of this situation is building up a liquidity war chest,” says LaMonaca. “Raise as much liquidity as you can, because even if you have too much liquidity, you can always pay back your loans right away, or even get loan forgiveness if the funds were used properly. So, there’s no harm in using these programs as a strategy to get to the other side of this and have your business reopen and revenues back in line.”
“One of the keys to getting to the other side of this situation is building up a liquidity war chest. Raise as much liquidity as you can, because even if you have too much liquidity, you can always pay back your loans right away, or even get loan forgiveness if the funds were used properly.”
In the state of California, for example, resources such as the California Capital Access Program and CA Infrastructure and Economic Development Bank Finance Programs provide access to funding for California-based businesses. On a county-wide level, Los Angeles County launched a $500,000 fund for business grants of up to $10,000 for struggling local businesses.
Given the uncertain timeline of loan disbursements, business owners are unsure of whether to hold on to their employees or let them go to allow them to file for unemployment benefits. “The stay-at-home order doesn’t result in an obligation of the business to keep paying employees,” says LaMonaca. “But the CARES Act does provide an incentive under its programs to keep getting employers to pay their employees and avoid layoffs.”
At the same token, however, LaMonaca also stresses that, “if you feel that you’re in a position where you need to stop the cash outflow immediately, the PPP allows you to rehire those employees back once you receive the funding and still qualify for the forgiveness feature of that loan.”
The staffing question is a part of a larger business planning decision. In addition to wanting to retain talent that you have already trained, having them ready on standby for when your business reopens is also something to consider.
“Communicate with your employees regularly, in the meantime,” says McGrath. “Be transparent and share your thoughts and plans for the future with them, especially if they’re unable to come into work right now.”
You need to realistically analyze the overall health of your business before applying for loans and funding options. “Before you apply, I would really take a hard, honest look at your company and what your assets are,” says McGrath. “Will the funding help you bridge the gap and get through? If you think you’ll still wind up closing your doors, I’m not sure applying would be the best decision.”
From tax rebates and credits, to expanded unemployment insurance, business owners and employees can find all the information they need to know here. “Any business owner needs to scroll through the CARES Act and figure out what applies to them,” says McGrath. “Some things are automatic, like the income tax deferment where the deadline for [filing and] paying your income taxes has been moved to July 15. Then there are other, more esoteric benefits, like allowing people to pull money out of their 401(k) or IRA to fund their business.” She does caution against pulling money out of retirement funds but highlights that the option is there.
With regard to taxes, the IRS has rolled out a refundable tax credit that is 50 percent of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. “So, if you don’t get a PPP loan, another way to get some relief is to pay your workers and take a direct 50 percent tax credit for the wages that you pay them,” says McGrath. The IRS is also issuing tax credits to provide small and mid-sized businesses the resources they need to offer paid sick and family leave wages for leave related to COVID-19.
McGrath adds, “A lot of people might not appreciate it, but they changed the CARES Act for the way you deal with net operating losses, and it now allows business owners to carry them back, instead of forward.”
What does this mean? “Say you had a good year in 2018, but in 2019 you took a loss. You’ve had a net loss in your business, and right now you can carry that loss backwards to 2018 or 2017, up to five years back,” explains McGrath. “You can file a claim and get a refund from the IRS for taxes you paid in prior years because of the loss you had in 2019.”
On the same token, McGrath says that if your business takes a loss in 2020 because of the coronavirus, you can apply that loss against taxable income and get a refund from the IRS. “If you have a loss this year, you can apply that loss to reduce your taxable income and take it against any income you paid taxes on in the last five years,” she says.