The Definitive Guide to COVID-19 LOANS
August 13, 2020 | Last Updated on: July 22, 2022
August 13, 2020 | Last Updated on: July 22, 2022
As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
The COVID-19 pandemic has altered the mindset of many small businesses, at least temporarily. Whereas the goals of small businesses heading into 2020 may been about growth, for many it’s now about survival.
Business plans for 2020 that included applying for a loan for expansion have been put on hold, with many small business owners asking: “Will coronavirus prevent me from getting a business loan?”
The answer is no. In fact, the CARES Act was signed into law in March to help small businesses get the funding they need. The CARES Act allows for $376 billion in relief for American workers and small businesses. This stimulus package also established a new temporary program – the Paycheck Protection Program (PPP) — to help the Small Business Administration (SBA) assist small businesses that were hit hard by the COVID-19 outbreak, and the resulting government-mandated lockdowns.
An attractive feature of the COVID business loans is loan forgiveness. The total amount of loan forgiveness for a PPP loan will include payroll for employees who earn less than $100,000 in annual income, mortgage and rent obligations, utility payments and interest. For employees who earn more than $100,000 in annual salary, only the first $100,000 will be included in the company’s loan-forgiveness bottom line. Employees who live outside the United States are excluded from the total amount of the loan forgiveness.
Payroll costs include health-care benefits, retirement benefits and state and local taxes.
The SBA created a new temporary funding program to address the economic fallout of the COVID-19 pandemic:
Other existing SBA loan programs have been expanded or have become more viable during the pandemic:
The interest rate on PPP loans is currently 1%. The CARES Act caps PPP loans at 4%. The interest paid on a PPP loan can be forgiven if the business keeps paying employees during the first eight weeks after it receives the loan.
SBA Disaster Loans are set at 3.75% for small businesses and 2.75% for non-profits. Payments can be deferred for up to four years.
The Main Street Lending Program (MSLP) was established by the Federal Reserve to support lending to small and medium-sized businesses that were in good financial shape before the COVID-19 pandemic. The MSLP is an especially good loan option for small business owners whose business may be somewhat larger than a typical small business and doesn’t fit the eligibility requirements for loans from the PPP and EIDL programs.
The MSLP offers two different direct loan options: the Main Street New Loan Facility (MSNLF) and the Main Street Expanded Loan Facility (MSELF). Between these two options, the Main Street Lending Program offers $600 billion in loans for eligible businesses.
All Main Street loans are four-year loans with a minimum loan size of $1 million and a variable interest rate between 2.5 and 4%. Principle and interest payments on both loan options have an automatic deferment period of one year.
The main difference between MSNLF and MSELF loans are the type and size of the loan. MSNLF loans are new loans originated on or after April 8, 2020, and cap out at $25 million. MSELF loans expand on existing eligible loans and can go up to $150 million.
A business must meet the following requirements to qualify for a MSLP loan:
Businesses may apply for MSLP loans directly through approved U.S. banks and insured depository institution.
In addition to the federal loan options, many states and municipalities have implemented their own financial assistance programs for small business hit hard by COVID-19. Among these states are California, Colorado, Connecticut, Florida, Illinois, Kentucky, Louisiana, Minnesota, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Pennsylvania, Utah and Washington. More state and local programs are being continually added.
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PPP Loans are open to small business and non-profits that meet the standard business-size definition of the SBA. In addition, veteran organizations with less than 500 employees are eligible for loans under the PPP. Self-employed individuals, independent contractors and sole proprietors are also eligible. Churches can also qualify if they meet the other requirements of the CARES Act.
As for the type of businesses that don’t qualify for a PPP loan, an example is household employers, such as those who hire housekeepers and nannies.
To receive a loan, a business must have been in operation as of February 15, 2020.
SBA Disaster Loans are available to businesses that have less than 500 employees and are unable to pay their bills.
According to the SBA, both PPP loans and SBA Disaster Loans are designed to help any businesses for which “current economic uncertainty makes the loan necessary to support ongoing operations.” Lenders determine whether a business can qualify, without the benefit of an independent SBA review. While both the SBA and Treasury Department have taken potential borrowers at their word about their need for a loan, both agencies haven’t given much in the way of specifics regarding the criteria for who is eligible for a loan and who isn’t.
Under the PPP, for instance, the SBA allowed borrowers to testify “in good faith” about their need for a loan. A standard requirement that businesses seeking an SBA loan must be unable to qualify for credit through other sources has been suspended by the CARES Act.
In one of the few specific declarations of business eligibility, the Treasury Department has stated that large, publicly traded companies with access to credit elsewhere probably won’t qualify for SBA loans, given that such organizations most likely couldn’t make “the required certification (regarding the need for a loan) in good faith.”
Franchisees of large corporations, however, are eligible for PPP loans – but only if they’ve registered as a franchisee and have been added to the SBA’s official directory. According to the Treasury Department, a franchisee can apply for a PPP loan as an independent business if it appears in the directory.
According to an SBA regulation, businesses that are “engaged in any activity that is illegal under federal, state or local law” are also disqualified from receiving SBA loans. Other factors that will lead to disqualification are the suspension or debarment of any owners of a company, if they are involved in bankruptcy proceedings or if they’ve previously received a small-business loan that has led to a net loss for the federal government.
Businesses that make fraudulent claims to a federally insured lender may face criminal penalties of up to $1 million. After several large businesses received PPP loans – and later returned them — the Treasury Department says it will now audit all loans larger than $2 million.
According to the SBA, independent contractors and sole proprietors can calculate their payroll by adding “wages, commissions, income or net earnings from self-employment or similar compensation.”
In addition, the Treasury Department lists “owner compensation replacement” among allowable costs needed to qualify for a PPP loan. Since the net profit of an independent contractor or sole proprietor is their payroll, their loan amount is based on their 2019 net profit divided by 12 to get an “average” monthly net profit. This number multiplied by 2.5 is their PPP loan amount.
Partnerships are also eligible for PPP loans. A partnership must submit a single application in which the self-employed income of all active partners count toward the payroll costs.
If a small business is closed due to COVID 19, but wants to re-open, it can apply for the same types of loan that a business that’s open can apply for. For PPP Loans, salaries must be set at their pre-closing level. An Economic Injury Disaster Loan can help with other expenses such as mortgage, rent, payments or other business-related debt.
Conversely, what happens if a business receives a PPP or EIDL and then goes under despite the assistance? Since all PPP and EIDL loans up to $25,000 don’t require collateral or personal guarantees, the lender typically couldn’t seize any business or personal assets. Still, default on the loan could have ramifications regarding the borrower’s credit worthiness.
Loans greater than $25,000, however, require collateral. This means that the SBA can seize any remaining assets to cover the debt. For disaster loans exceeding $200,000, the lender can target the personal assets of a business owner.