Written by: Tom Farrer, CFP®, CRPC® and Mychal Eagleson, CFP®, AIF®, ChSNC®
As news of the Coronavirus spreading across the US continues to be brought into your family room and dominate your social media, we encourage you and your families to be safe and stay at home when possible. Again, the Centers for Disease Control and your doctor’s orders regarding your personal health are your best source of advice regarding your personal health. On the other hand, if you have questions or concerns regarding the impact on your financial health, near-term goals, or opportunities created by recent governmental stimulus packages, we encourage you to give us a call.
Today, we would like to provide a summary of two types of small business loans that are available through the CARES Act which provides $349 billion in Small Business Administration (SBA) loans. Since many educators have a spouse or loved on who owns a small business, or own one themselves on the side or for summer work, we wanted to share this timely information with you.
These business loans have been created by the federal government with the goal to put money in the hands of small business owners, as quickly as possible, to cover loss of revenue, rent, payroll, and other costs of doing business. The two loans that we are going to summarize are the Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP) loan.
Economic Injury Disaster Loans (EIDL)
This loan is especially important for small business owners because you can request a $10,000 grant; essentially an advance on your loan for businesses experiencing a temporary loss of revenue that does not have to be repaid.
- EIDL loans offer up to $2 million for items such as fixed debt and payroll. You can apply for the EIDL loan on the SBA website www.sba.gov/disaster.
What It Means for You:
1. If you are a business with under 500 employees, you are considered a small business (with some exceptions) and can qualify for the loan. All 50 states have been declared disaster areas and qualify for the loan program.
2. Nonprofits and veterans’ organizations also qualify.
3. The SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay. Also, there is an automatic one-year deferment on repayment so the first payment is not due for a full year, although interest begins to accrue at time of disbursement.
4. The SBA advertises that you will receive the $10,000 grant (you must make sure it is checked on your application) within three days of filing the loan application, regardless of whether or not you ultimately qualify for the loan.
5. The estimated time for completing this entire application is approximately two hours according to the SBA website.
Paycheck Protection Program (PPP) Loan
You can apply for both the EIDL and the PPP loans, but you cannot use funds from each loan for the same expenses (such as payroll, rent, insurance, etc.).
Yesterday, I read a headline that stated the PPP Loan program was off to a “rocky start”. What that means is regulations are still evolving regarding these loans, and banks are still figuring out how to best meet the program requirements and client needs while managing overall risk. Most banks we have spoken to are only working with existing business clients that had an pre-existing business account prior to February 15, 2020.
The primary takeaway is while the SBA is trying to reduce the lending requirements as much as possible, there is a limit to the amount of funding that has been approved ($349 billion dollars), so it is important that you apply as soon as possible.
A potential benefit of a PPP loan is the possibility of having all or a portion of the loan forgiven.
- Lenders will generally be able to issue small business loans up to a maximum of the lesser of $10 million, or 2.5 times the average monthly payroll costs over the previous year (excluding annual compensation of amounts over $100,000 per person)
- Such loans must be applied for by June 30, 2020 and can have a maximum maturity of 10 years.
- Applications for this loan through an SBA-certified lender will be accepted beginning on April 3.
What It Means for You:
1. Who can apply:
Any small business concern that meets SBA’s size standards (either the industry based sized standard or the alternative size standard)
- Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans’ organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
- 500 employees, or
- That meets the SBA industry size standard if more than 500
Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location
Sole proprietors, independent contractors, and self-employed persons
2. If you received the EIDL $10,000 grant (mentioned above), that will be subtracted from the forgiveness amount in a PPP loan.
3. Once the PPP loan is secured, you track your expenses in the following areas for 8 weeks:
- Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000
- Mortgage interest or rent pursuant to a lease in force before February 15, 2020
- Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020.
After the 8-week period, and a review from your loan provider, they will forgive the portion of the loan used for approved expenses (i.e., it becomes a grant you do not have to repay). At least 75% of the forgiven amount must be used for payroll expenses.
3. Also, in order for the above amounts to be forgiven, the business must maintain the same number of employees (equivalents) in the eight weeks following the date of origination of the loan as it did from either February 15, 2019 through June 30, 2019, or from January 1, 2020 through February 29, 2020. If you reduce headcount during this time, they will reduce the forgiveness in proportion to the reduction.
4. For the portion of the loan not forgiven, the maximum interest rate that can be charged under this program is 4%. Interest does accrue from the start of the loan, but there is a 6-month deferment on the first payment and no prepayment penalty.
5. As an additional bonus, the PPP loan terms state that any debt forgiven will not be included as taxable income for the year.
6. To begin your application, you can download a copy of the PPP borrower application form to see the information that will be requested from you when you apply with an approved SBA lender.
Again, we want you to keep yourself and your family safe during this stressful period. Also, we want to thank you for taking a few minutes to better understand how you can benefit from the CARES Act as it applies to small business owners. If additional loan programs or additional instructions become available in the coming weeks, we will update this article, so please feel free to bookmark this article, and check back for additional information, and share it with anyone you think it might help.
Before you go, we’d value the opportunity to have a conversation with you to discuss your financial planning, how the provisions of this bill may affect you, and generally how you can make the most of your finances. Right now may be the best time to examine your situation and plan for what’s ahead.
Tom Farrer, CFP®, CRPC® is a Financial Planner with An Exceptional Life Financial, an independent financial planning firm specializing in finance for teachers. He served for six years as an executive at the Indiana Public Retirement System (INPRS), Indiana's largest pension plan and the one that specifically covers teachers' retirement. His passion for working with individuals one-on-one to achieve their goals motivated him to earn the CERTIFIED FINANCIAL PLANNER™ designation in late 2019, and join An Exceptional Life Financial in 2020. He's a proud member of the Financial Planning Association of Greater Indiana, the National Association of Personal Financial Advisors (NAPFA), and the XY Planning Network and serves on the board of the Shepherd's Center of Hamilton County.
Mychal Eagleson, CFP®, AIF®, ChSNC® is the President of An Exceptional Life Financial, an independent financial planning firm specializing in finance for teachers. His passion is helping teachers plan for successful financial futures and he frequently writes and speaks on important financial topics and how they specifically affect teachers' personal finances. He serves on the board of the Financial Planning Association of Greater Indiana as the President-Elect and Co-Director of Programming, serves as a member of the Professional Advisory Leadership Council for the Central Indiana Community Foundation, and is a proud member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. To read more of the articles he's written or been quoted in through national publications, or to learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.