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How the CARES Act’s loan programs help small businesses affected by COVID-19

Bank of Montreal Museum, Montréal, Canada
Photo by Ferran Fusalba Roselló

Small businesses across the country have been hammered by the impact of the Coronavirus outbreak. The nearly 30 million businesses that are the backbone of our economy—not to mention critical to the fabric of our communities—are struggling to stay viable, or even open, as shelter-in-place restrictions curtail their revenue. 

In response to the pandemic, the federal government has passed a number of relief bills that deliver various direct cash payments, tax deadline extensions, and—specifically in the case of small businesses—new loan programs. By far the largest bill so far is HR 748, a $2 trillion package known as the “CARES” Act. 

Let’s examine what the CARES Act delivers for small businesses, how owners and employees alike will benefit, and what additional help may be coming. 

SBA small business loan programs

The most pressing and immediate need for small businesses right now is funding, as many small businesses (especially in hardest-hit industries such as hospitality and food service) don’t have enough of a cash cushion to last more than a month with no revenue. Small business loans and grants are therefore of extreme importance. 

The CARES Act created and financed a number of small business loan programs that will either be administered directly or guided by the Small Business Administration (SBA). In all, the CARES Act dedicated more than $350 billion toward various small business financing initiatives. Here’s the breakdown of these programs. 

Paycheck Protection Program

The new Paycheck Protection Program (PPP), which officially went live on April 3, provides $349 billion in funding to small businesses through 100 percent federally guaranteed low-interest loans—loans that can be forgiven if businesses use the funds according to program guidelines within a certain time frame. [Editor’s note: Congress replenished PPP with an additional $310 billion, and the program reopened for applications on April 27.]

The essence of the program is as follows: Businesses in operation prior to February 15, 2020 are eligible to apply for a PPP loan through an SBA-certified lender (including national and community banks, credit unions, and non-bank lenders across the country) to cover the costs of payroll and other financial obligations such as rent, mortgage interest, or utilities. 

Loans are available to small businesses (typically meaning 500 or fewer employees), nonprofits, veterans organizations, Tribal concerns, sole proprietorships, self-employed individuals, and independent contractors.

The terms of the loans include: 

  • Loan amounts up to 250% of the business owner’s average monthly payroll costs, not exceeding $10 million
  • Loan proceeds used to cover the first eight weeks of payroll costs, rent, utilities, and mortgage interest will be forgiven by the SBA
  • Interest rate of 1%
  • Maturity of two years
  • First payment deferred for six months
  • No collateral
  • No personal guarantees
  • No borrower or lender fees payable to SBA

Because the bulk of the CARES Act funding for small businesses will be funneled through this program, and the fact that these loans can be forgiven (effectively turning them into grants), demand for access to these loans is at an unprecedented level. The government officially opened the PPP on April 3—but few banks were ready to participate, and many of those limited access to existing customers only. More lenders are expected to open their application process to more small business owners in the days and weeks to come, leading to broader access to the funding. 

In the meantime, if you’re a small business owner without an existing relationship with a bank offering PPP loans, you can apply for one through Fundera’s PPP application—Fundera will look to match you with a lender accepting new customers who can work quickly to address your funding needs.  

Economic Injury Disaster Loans

An additional $10 billion was allocated to the SBA’s existing Economic Injury Disaster Loan (EIDL) program through the CARES Act. 

Typically, small businesses affected by a disaster such as a tornado or flood would be eligible to apply through the SBA’s Disaster Assistance program. In the weeks following the COVID-19 outbreak, every U.S. state and territory has been declared a disaster area, making all impacted businesses eligible to apply for an EIDL. 

You can use an EIDL to help offset the temporary loss of revenue due to the Coronavirus outbreak. Loans of up to $2 million will be administered directly by the SBA. 

The CARES Act also created a $10,000 emergency loan advance through the EIDL. Business owners that apply for an EIDL can request an immediate advance (delivered within three days) of $10,000 that will not have to be repaid—even if the business does not qualify for the EIDL.  

It’s possible to refinance an EIDL into a PPP loan, so applying for both loans is an option for impacted business owners. 

The SBA recently updated the online application process for applying for an EIDL related to the Coronavirus pandemic. The SBA estimates that it will take a little more than two hours to complete the application.

Other debt relief and small business assistance

In addition to these lending programs, the CARES Act allocated an additional $17 billion to pay the principal, interest, and fees on existing SBA loan products for six months for businesses impacted by the Coronavirus. 

More funding will also be made available to SBA resource partners—including Women’s Business Centers and Minority Business Centers—to provide counseling, training, and other assistance. 

Payroll tax credits

The Treasury Department has extended this year’s tax filing and payment deadline to July 15, 2020. This will allow businesses to hold on to extra capital that they would otherwise need to pay to the IRS. Businesses that expect to receive a refund should file right away to receive that money. 

Through the CARES Act, however, more tax relief is available thanks to payroll tax credits. The Employee Retention Credit, a tax credit against the employer’s 6.2 percent share of Social Security payroll taxes, allows businesses to receive a refund for half of what they spent on wages, capped at $5,000 per worker. 

To qualify, businesses must prove they took a 50 percent loss compared to the same quarter in years past. 

Employers—even those not impacted by the pandemic—can also defer payment of the Social Security tax that would otherwise be due in December 2020. They can defer 50 percent of the payment until December 31, 2021, and the other 50 percent until December 31, 2022. Self-employed taxpayers can defer paying half of their self-employment tax until the end of 2021 and 2022 as well.

Keep in mind: Neither the tax credit nor the deferral are available to businesses with a PPP loan. 

Expanded unemployment insurance

A difficult balancing act for small businesses during this pandemic is if, when, and how to lay off their staff. 

The measures outlined above are meant to encourage small businesses to keep workers on their payrolls for as long as possible—hopefully through the darkest days of the outbreak and out to the other side. 

If you’re unable to maintain staff, the CARES Act has, at least, expanded unemployment benefits. Workers laid off as a result of the pandemic will receive an additional $600 per week on top of the weekly benefit amount an eligible employee otherwise receives under state law. The law also increases the maximum number of weeks an individual may receive benefits to a total of 39 weeks, up from 26 weeks previously. 

The bottom line

The CARES Act is the third phase of the government’s response to the outbreak, and there will likely be more phases to come. We expect that future legislation will increase the amount of funding to the Paycheck Protection Program, as well as perhaps the Economic Injury Disaster Loan program, and more financial resources are likely to be made available as well—all of which are desperately needed to help small businesses that are struggling to stay afloat and to ensure the future of America’s entrepreneurship class.

Sally Lauckner is the editorial director at Fundera and the editor-in-chief of the Fundera Ledger.