Like most small businesses in the US, Hadley Capital and its portfolio of small businesses faced unprecedented challenges resulting from the impacts of COVID-19 in 2020.
As we head into 2021 with continued uncertainty and navigate the resources available to small businesses, I will be posting a checklist for small business owners along with links to various third party resources.
This is not meant to be professional advice – please speak with your accountants, attorneys, human resources, and payroll advisors for guidance.
Small Business Loans
Small business owners are faced with an unprecedented dilemma resulting from the economic realities caused by the COVID-19 pandemic: you want to protect the business from severe cash flow issues but also want to care for your employees and not lose your businesses most valuable resource (its people).
This post provides a checklist of loans or financing options available to small businesses. This list was originally posted in April of 2020 and updated in January of 2021:
SBA Express Bridge Loans
Loan Amount: Up to $25,000
Rate and Term: Unknown but will be replaced by EIDL, described below.
If you currently have an SBA Express Lender relationship, your first step should be to apply for an SBA Express Bridge loan of up to $25,000. This program has a fast turnaround and will be paid off in part or in whole by the EIDL loan described below or may be turned into a term loan.
Recommendation: If you have an SBA relationship, start here first as the turnaround time is the quickest.
Where to apply: SBA Bridge Lender. You need to contact your local SBA office to find the lender.
Covid-19 Economic Injury Disaster Loan (EIDL) Program
Purpose: To meet financial obligations and operating expenses that could have been met had the disaster not occurred.
Loan Amount: EIDL Advance up to $10,000 and up to $2.0 million for total EIDL
Rate: 3.75% for small businesses and 2.75% for non-profits.
Collateral: None for loans under $25,000; Required for loans over $25,000; Personal guarantees required for loans over $200,000.
Term: Up to 30 years
The EIDL program has been in place since 1953 and is designed to provide working capital loans that may be used to pay accounts payables, debt obligations, payroll, rent, and other bills.
COVID-19 is the first time it has been used for a pandemic. Small businesses can receive up to $2 million in working capital. You may request a $10,000 cash advance in three days (this program is currently out of funds). The cash advance does not need to be repaid if you are unable to get the loan.
This loan is administered directly by the SBA and can be received in addition to the Paycheck Protection Program, although you have to use the funds for
Who is Eligible: Small business owners and qualified agricultural businesses in all U.S. states and territories are currently eligible to apply for a low-interest loan due to COVID-19. Agricultural businesses with 500 or fewer employees are now eligible.
If you want to learn if your business qualifies as a small business, check out Small Business Size Standards Matched to NAICS Codes published the SBA. Companies qualify either by number of employees or by revenue.
Recommendation: Apply for the loan if you are eligible and your small business has uses outside of what will be provided by the Paycheck Protection Program. It is a low-cost source of financing with no repayment penalty.
Where to apply: SBA Covid-19 Economic Injury Disaster Loan. The application takes about 10 minutes.
For additional information on the EIDL Program vs. PPP below, click here. *Please note the resource incorrectly states PPP is closed, which is no longer accurate.
Paycheck Protection Program (PPP)
The Paycheck Protection Program was first authorized by the Coronavirus Aid, Relief, and Economic Security Act and began accepting applications on April 3, 2020. The program ran through August, 8th, 2020 and closed with approximately $130 billion available. In December 2020, the Consolidated Appropriations Act opened back up the Paycheck Protection Program for both 1st and 2nd Draws.
1st Draw PPP Loans
Purpose: PPP is designed to help small businesses meet payroll obligations, pay rent or a mortgage or leasing agreement, and pay utilities.
Loan Amount: 2.5x Average Monthly Payroll Costs up to $10 million. The U.S. Chamber of Commerce provides information on calculating your loan amount.
Rate: 1%
Collateral: None
Term: Up to 5 years, if not forgiven
Who is Eligible:Any small business (including self-employed, independent contractors, and sole proprietorships) with under 500 employees (some exceptions) that was in operation before February 15, 2020 may apply. Unlike the EIDL program, PPP has exceptions to the normal SBA Affiliate Rules.
Loan Forgiveness: The most attractive aspect of this loan is that a portion of or all the loan can be forgiven to the extent it is used on the above obligations. The business is required to use at least 60% of the funds on qualified payroll expenses.
Reduction of Forgiveness: The forgiveness is reduced if there is a reduction in the number of employees or greater than 25% reduction in wages. To learn more about all the aspects, please read the Interim Final Rule 1.
Recommendation: Every small business should apply.
Where to apply: The PPP is administered through banks that administer SBA 7(a) loans and includes banks that are in the process of registering with the SBA. Call your primary business bank to determine if they will administer PPP.
2nd Draw PPP Loan: Unless noted otherwise below, all terms of the First Draw PPP Loan apply to the 2nd Draw:
Loan Amount: 2.5x average monthly payroll for 2019 or 2020 up to $2 million (not $10 million); or 3.5x for Accommodation and Food Service Sector. (NAICS codes 72).
Who is Eligible:
- Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses
- Has no more than 300 employees; and
- Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020
- Did not receive the Shuttered Venue Grant.
To learn more about the Second Draw PPP rules, please refer to the Interim Final Rule on Second Draw Loans.
Employee Retention Tax Credit (ERC)
In addition to the loan programs available above, the Appropriations Act of 2021 modified the Employee Retention Tax Credit eligibility rules. Prior to the Appropriations Act small business were ineligible to take advantage of the ERC if they received a PPP loan.
In addition to the Paycheck Protection Program, small businesses may now also take advantage of the ERC. Stay tuned for our upcoming post with more information.
Conclusion
Small businesses are often like big families and the COVID pandemic has created an unprecedented dilemma for all of us to protect our businesses and our employees. These programs are a great start at dealing with this dilemma.
In the upcoming posts, we will dive into the Employee Retention Tax Credit (ERC) and changes to Net Operating Loss rules.
