Is There a Right Time to Apply for Disaster Loan?
Are you asking yourself: Should I take advantage of government coronavirus pandemic assistance programs for small business owners? This article will provide guidance on how to apply for a disaster loan.
Maybe you own a grocery store, take-out restaurant or other type of business that’s doing okay despite the COVID-19 pandemic. Perhaps you’re not in a hard hit area like New York. You may think it’s better to not seek relief and reserve the money and tax benefits for businesses that need it more. Many are dealing with forced closures because of social distancing, layoffs and lower (or no) sales and are unable to meet their operating expenses.
If you’re not planning to take advantage of assistance programs, it may be time to adjust your thinking.
The United States government is providing small business owners with more support than ever. Additional help could be on the way.
The purpose is to prop-up the economy so it makes it through the coronavirus pandemic. The goal is to keep small businesses — the life blood of the U.S. economy — going during the crisis and help them preserve working capital. This is true even for businesses that are not being impacted as significantly by COVID-19 as others. Economic experts are setting things up so businesses can re-emerge after the pandemic is over in essentially the same condition they were in before it started.
Here are some government loan and tax programs you may be able to take advantage of now and in the months ahead. You owe it to yourself to leverage any that make sense for your business. If you don’t, your competitors will, which will give them a big leg up once the crisis is over.
Cares Act Paycheck Protection Program
The largest and best known of all the coronavirus outbreak stimulus programs is the Cares Act, which was recently passed by the United States House of Representative and Senate and signed into law by President Trump. The $2 trillion stimulus package is by far the biggest in U.S. history. A critical part is the Paycheck Protection Program (PPP). It includes $349 billion in forgivable small business loans that are 100 percent guaranteed. They are offered through — and guaranteed by — the U.S. Small Business Administration (SBA).
The maximum amount a business can borrow is two and a half times its average monthly payroll or $10 million, whichever is less. The calculations are based on the previous 12 months of total payroll expenses, excluding individual pay over $100,000. There is some seasonality involved in the calculation for certain types of businesses. (Your borrower will help you figure it out.) You must have been in business prior to February 15, 2020 to qualify.
The primary purpose of the PPP is to help businesses maintain their workforces (and keep people from applying for unemployment benefits) through the coronavirus pandemic. Any borrowed money used for payroll expenses (including some health care related insurance costs), along with interest on mortgage payments, rent and utilities over an eight week period will be 100 percent forgiven as long as payroll and headcount are maintained. If you don’t keep them at pre-pandemic levels, the forgiven amount will be reduced. Businesses that cut headcount as a precautionary measure have until June 30, 2020 to restore it.
Any money not used for approved expenses during the eight week period will not be forgiven and must be paid back at a one percent interest rate within two years. Loan payments will be deferred for six months.
Eligibility for the program is broad. Businesses must have 500 or fewer employees, although there are exceptions for industries heavily impacted by the COVID-19 crisis including restaurants, hotels and catering operations. The limit for them is 500 people per location for up to five locations. (Your loan provider should be able to answer your questions.) Sole proprietors, independent contractors and self-employed people may also qualify.
These small business loans are distributed through the same financial institutions as the SBA’s 7(a) loans, although additional ones will be added in the future.
Small business owners and sole proprietors can apply for a disaster loan as of April 3, 2020. Independent contractors and self-employed people are able to apply starting April 10, 2020. The deadline for applications is June 30, 2020. While there have been delays with early loan applications, it’s expected that they will soon be evaluated and approved in real time.
The disbursement of loan money is on a first-come, first-served basis, although it’s likely more money will be added to the program if demand continues to be as high as it’s been over the last week.
Tip: The SBA.gov website is a great source of information about the SBA disaster loans and other financial assistance available related to the COVID-19 pandemic. You are urged to check the SBA site before you apply for a disaster loan.
Economic Injury Disaster Loans
Prior to the Payroll Protection Program, Economic Injury Disaster Loans (EIDLs) were the only option for small business owners seeking relief from the coronavirus pandemic.
The loans, which are typically made available during natural disasters, are administered by the SBA. These low interest loans are available for up to $2 million in states that have declared an economic disaster. The interest rates for EIDLs is 3.75 percent for businesses and 2.75 percent for nonprofits. There are fewer limitations on what money from these loans can be used for compared with PPP loans. Many experts recommend taking out a PPP loan first and reserving loans from this disaster loan program for future emergencies and other expenses. Consult with your financial advisor or loan provider to figure out what’s best for your business.
As a part of this program, business owners may apply for emergency cash advances of up to $10,000. If the emergency funds are used to cover approved expenses such as payroll, the advance will be forgiven and considered a grant. Application procedures for these funds are the same as for EIDLs.
SBA Express Bridge Loans
The Small Business Administration also has express bridge loans available for businesses negatively affected by the coronavirus crisis. Bridge loans are typically used by organizations to get through short-term crises.
The loans are available for up to $25,000 and can be made through March 13, 2021. The loan money may be used to cover emergency expenses while you wait for a Economic Injury Disaster Loan to be approved. The EIDL can be leveraged to repay all or part of your express bridge loan, although the maximum bridge loan term is seven years. These loans are offered through SBA-approved lenders. To apply for a disaster loan, you are strongly advised to go through a certified lending institution.
Small Business Administration 7(a) Loans
The SBA’s 7(a) loans are part of a long-standing program. They’re available to most small businesses. You can borrow up to $5 million. The 7(a) loans are guaranteed by the SBA for 75 percent (in certain situations, 85 percent) of the loan value. These loans can be used for a relatively broad array of business purposes.
Express Loan Program
SBA express loans are a type of 7(a) loan. You can borrow up to $350,000. The loans are guaranteed up to 50 percent of their value by the SBA. The difference between an express loan and a typical 7(a) loan is that express loan approvals are made by lenders, not the SBA, which makes the process faster.
Community Advantage Loan Program
These loans are similar to those offered through the 7(a) program. Community advantage loans are reserved for businesses in underserved markets. You can borrow up to $250,000.
504 loans can only be used to acquire or refinance fixed assets. Their purpose is to foster economic development and support job creation. You can borrow up to $5 million on a 504 loan.
Microloans are reserved for businesses in underserved markets. They’re available through non-profit organizations. You can get one for up to $50,000, although the typical microloan is much smaller.
Small Business Administration Debt Relief Program
The SBA Debt Relief Program provides immediate loan assistance for business owners who have SBA 7(a) loans, 504 loans and microloans. If you have one, the SBA will cover all loan payments for the next six months, including principal, interest and fees. This program is also available for businesses that take out new loans within six months of the enactment of the CARES Act. The debt relief is automatic. Double check with your lender to make certain.
Employee Retention Credit
Loans aren’t the only relief being offered to small businesses. You may qualify for the Employee Retention Credit if you were forced to stop doing business by a government authority or if your gross receipts are less than half of what they were during the same quarter of last year.
The credit is 50 percent of qualified wages, including health care plan expenses, paid in a calendar quarter, with a limit of $5,000 per employee.
The period covered by the Employee Retention Credit is from March 12 through December 31, 2020. If you take the credit, you can apply it against the portion of employee Social Security taxes that you pay. If there’s an overpayment, it can be applied to other tax liability. You are also able to hold back income taxes that you’re required to deposit with the IRS if you plan to take advantage of the credit.
Important note: You cannot claim the Employee Retention Credit if you have a PPP loan.
Tax return deadline
The 2020 deadline for filing business and individual tax returns has been pushed back to July 15. This gives you more time to prepare them and plan for how you will pay if you owe income tax money.
State and local business stimulus programs
In addition to federal programs, there are also many state and local initiatives available to small business owners. Search for them online or contact your local chamber of commerce or small business development center to find out more.