This article has been updated as of July 6, 2020 and includes interim rules from the Small Business Administration (SBA) as well as the Paycheck Protection Program (PPP) Flexibility Act legislation passed on June 5, 2020 to provide more flexibility and time to qualify for loan forgiveness.
Both small and large businesses have been significantly impacted by the effects of the coronavirus outbreak and have had to make critical decisions over the last few weeks. To facilitate our clients who own businesses, we have compiled relevant information and possible actions in light of the current difficult business conditions and the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Reaching Out to Your Existing Bank Relationships
If you have not done so, consider reaching out to your banker to assess the potential for drawing down on an existing line of credit, initiating a new asset- or collateral-based loan, or finding other financial arrangements to maintain liquidity, avoid defaults on any existing loans, or to help finance other business working capital needs. Inquire about possible forbearance and flexibility on existing loan repayments or provision of additional lines of credit. We recommend consulting with your attorney to review your options and/or confirm your understanding of your obligations and contractual rights.
SBA Loans for Businesses Impacted by COVID-19
Under the CARES Act and other 2020 COVID-19 legislation, loan programs through the U.S. Small Business Administration (SBA) are available for businesses affected by the coronavirus outbreak:
The Economic Injury Disaster Loan Program (EIDL) offers a 3.75 percent interest rate per year up to a 30-year term. There is also the potential to receive up to a $10,000 loan advance that will not have to be repaid.
The Paycheck Protection Program (PPP) provides cash flow assistance through 100 percent federally guaranteed loans to employers with less than 500 employees as well as self-employed individuals that have been adversely impacted by the coronavirus outbreak. PPP has a host of attractive features, such as forgiveness on payroll costs paid and incurred during the 24-week period following the covered loan origination. If a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs. The borrower may use up to 40% of the loan amount for: (1) any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation); (2) any payment on any covered rent obligation; or (3) any covered utility payment. A business will have five years to repay the loan at the 1% interest rate. PPP loan recipients may defer repayments of principal, interest, and fees to the date that SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period). Small businesses and other eligible entities will be able to apply if they were harmed by the coronavirus between February 15, 2020 and August 8, 2020. The last date on which a PPP loan application can be approved is August 8, 2020. For more information, please reference the SBA website.
The toll-free number for questions regarding SBA loan programs is (800) 659-2955. Your existing bank may also be able to help facilitate this process.
Consider Non-Traditional Lenders
There are non-bank lenders (such as LendingClub, Upstart, Kiva, Funding Circle) that may allow you to apply for business loans directly online. The terms of these loans are likely to be less favorable versus the government and bank alternatives under the recently passed CARES Act, but these non-traditional lenders could provide competitive capital alternatives compared with expensive credit card debt.
Communicate with your Landlord(s) and Vendors for Flexible Terms
Discuss potential rent and expense abatements and flexible payment options. For businesses that carry inventories, stay in close contact with your most critical business partners to manage inventory needs, evaluate financial status, and understand other issues and constraints.
Reach out to Credit Card Issuers about Temporary Relief
Several credit card issuers have offered temporary relief to businesses and individuals impacted by COVID-19. Here are some links: Chase, Citi, Capital One, Bank of America, American Express, and Discover. Also, some credit card issuers may be willing to provide zero- or low-interest “teaser” rates in this current environment, for a limited number of months. But monitor your credit card contractual terms for upcoming interest-rate reset deadlines that would significantly increase your business borrowing costs. If cash permits, consider paying off or transferring balances of any outstanding credit card balance to a lower interest rate card before a cheap teaser rate becomes an expensive oversight.
Review Your Business Insurance Policies
Now is the time to review your insurance policies and consult with your insurance agent or legal counsel to assess the potential for filing a business interruption claim for business losses caused by COVID-19. It may also be feasible to consult with your insurance agent to understand coverage for potential claims that may arise as a result of COVID-19’s impact on your business.
What about Employees?
Many business owners are being forced to make difficult decisions about whether they can continue to pay their full-time employees. If a struggling business is not eligible or chooses not to participate in the SBA PPP, and the business has been forced to fully or partially suspend operations, or has seen a significant drop in revenues, it may be eligible for an employee retention payroll tax credit. For businesses with 100 employees or fewer, the employee retention payroll tax credit is equal to 50-percent of wages paid (up to $10,000 per employee), regardless of whether an employee is furloughed. Wages that qualify for the credit under the recently enacted Families First Coronavirus Response Act, available for mandatory paid sick leave and family and medical leave, are not eligible for the credit. Small business owners should look out for information at IRS.gov and talk to their payroll service provider, as applicable and consult with their tax adviser.
For those employees who will be collecting unemployment benefits, the CARES Act provides significant enhancements. The amount of benefits paid have been increased by $600 per week through July 31, 2020.
Employees affected by COVID-19 may also obtain penalty free access to distributions up to $100,000 from their employer qualified and individual retirement accounts. The distributions are not subject to mandatory employer tax withholding and may be taken into income over three years. In addition, an individual may recontribute the funds within three years. Any amount repaid is treated as if it were rolled over, and thus, not included in the employee’s gross income. Further, the CARES Act provides enhancements to loans from certain retirement plans for coronavirus-related relief.
We hope you find this guidance helpful as you navigate this difficult period. Your Modera Wealth Manager can help assist your business in a variety of areas – including connecting you to the right people inside and outside of Modera for specific needs and advice – and be your objective guide through this turbulent time.
Please keep in mind this information is changing rapidly and is based on our current understanding of the new CARES Act programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on these suggestions for your financial decisions. We recommend you consult with your attorneys, CPAs, insurance agents and other advisers before you take action.
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