How can I use a Coronavirus Loan?
Many US businesses and individuals have been severely impacted by the global coronavirus pandemic this year. Thankfully, On March 27th, 2020, The CARES Act was passed by Congress and signed into law. This historic initial $2.2 trillion stimulus package provides much needed assistance for millions of businesses, contractors, self-employed individuals, veteran organizations, and eligible non-profit organizations. There are two main programs introduced in the CARES Act, the Paycheck Protection Program (PPP) and the Economic Injury and Disaster Loan (EIDL). On April 24th, 2020 a $484 billion “Phase 3.5” emergency interim relief package was signed into law. $310 billion of this new funding was reserved for the PPP program and $60 billion was allocated to disaster / emergency funding. We will outline the specific ways in which funds provided in these programs may be used.
Ways to use a Paycheck Protection Program Loan
The CARES Act established the Paycheck Protection Program (PPP) with support from the Department of the Treasury to authorize up to $349 billion in funds for small businesses in order to increase job retention & cover other specific expenses. The PPP Program was created to allow small businesses to maintain their payroll, hire employees back who may have been laid off, and to cover applicable overhead expenses. As of April 24th, this amount has been expanded for an additional $310 billion for a total of $659 billion in funds. Companies with less than 500 employees are eligible for a PPP loan and eligible companies will not need to provide collateral or a personal guarantee.
Another advantage is that some or all of the principal loan amount may be waived if the loan amount is used for approved expenses. Please note that only a portion of these funds are eligible for forgiveness. The funds that cannot be forgiven would be subject to a 1% interest rate with a 2 year loan term. Here are ways we recommend a PPP loan be used so that the loan to be forgiven. Please keep in mind that the primary purpose of a PPP loan is to encourage companies to maintain payroll and to hire back employees who might have been laid off.
- Up to eight weeks of payroll costs like salaries, wages and commissions (capped at $100,000 on an annualized basis for each employee) can be forgiven.
- Up to eight weeks of employee benefits, including healthcare insurance premiums, vacation, parental, family, medical, or sick leave, and retirement benefits can be forgiven.
- Up to eight weeks of rent and utility expenses can be forgiven.
- Up to eight weeks of mortgage interest payments can be forgiven.
There are a lot of expenses a small business can incur and the spirit of the program is to keep people employed. If you keep your employees or hire back employees who may have been laid off your loan can be forgiven. If you do not maintain staff and payroll then you will lose eligibility for forgiveness based on how much your number of staff or payroll decreases.
Please see this PPP Loan Calculator for some rough calculations on what portions would be forgivable if you kept the same amount of payroll.
How You Can Use an EIDL Loan
Fortunately for small businesses that were directly affected by the COVID-19 economic disaster, the EIDL program is another option to receive funding. The type of businesses that may be eligible for EIDL funding include most small businesses and private non-profits with fewer than 500 employees. Some of the most heavily impacted businesses that will most likely qualify include retailers, hotels, wholesalers, manufacturers, rental property owners, restaurants, and many more. An eligible business may borrow up to two million dollars at a 3.75% rate for small businesses and a 2.75% rate for most private non-profit organizations. The term of the loan can be up to 30 years (as determined by your lender) and there are certain criteria that a business must meet including: acceptable credit history, ability to repay the EIDL loan, and various eligibility requirements. The funds from an EIDL loan may be used for the following purposes:
- Employee payroll
- Accounts payable
- Fixed debts (ex: rent payments)
- Some bills that would have been able to be paid had the pandemic disaster not occurred.
Sustaining your Business Through Tough Times
The coronavirus pandemic has created formidable damages and risks for businesses around the world. Thanks to the U.S. Department of the Treasury and SBA.gov, trillions of dollars in much needed funding has been made available to eligible businesses and individuals in the US. In addition to existing Small Business Administration programs, businesses may use two newly introduced options, PPP Loans and EIDL Loans, in order to keep their operations afloat. We feel that flexible provisions & favorable terms make these new programs attractive for eligible businesses and it is our hope that this new round of funding will bolster the health of many in need.