Small businesses should be aware of the government backed relief programs available to them during the COVID-19 pandemic. Among the programs are Federal retention loans, debt relief and grants. The CARES Act (Senate approved on March 25, House approved on March 27) would provide more than $350 billion in relief for small businesses (businesses with less than 500 employees). To qualify for these programs a business must be operational on February 15, 2020, have employees for whom it paid salaries and payroll taxes, or paid independent contractors, and be substantially impacted by COVID-19.
Banks can lend directly to small businesses and the loans will be guaranteed by the SBA. These so called “retention loans” can be used to meet payroll as well as overhead. These loans are available to sole proprietors, self-employed individuals and 501(c)(3) organizations as well. No personal guarantees, collateral or “credit elsewhere” test required (less stringent than SBA disaster relief loans). Retention loans will be forgiven for the amounts spent within the first 8 weeks of origination of the loan to the extent used for wages, mortgage interest, rent and utilities, based upon employee retention. Loan forgiveness will not be income to the small business. Loan amounts are tied to a formula dependent on payroll costs (generally 250% of average monthly payroll cost). The maximum loan size is $10 million and amounts not forgiven will have a maximum 10 year term and a maximum 4% interest rate, with no prepayment penalties. There are no fees to apply and the website to take requests should be up and running the first week in April. The hope is that requests will be taken and disbursements made on the same day.
SBA debt relief is also available for a six month period to cover principal, interest and fees owed on certain defined SBA loans that were granted prior to the COVID-19 pandemic. Loans already on deferment would receive an additional six months of payment by the SBA.
SBA grants are available for small businesses that have applied for an SBA Economic Injury Disaster Loans “EIDL”. Applicants can now request a $10,000 advance on the loan which the SBA is required to distribute within three days. Applicants are not required to repay the $10,000 even if they are subsequently denied the EIDL. It is important to note that an SBA EIDL may be used in addition to retention loans but only to the extent the funds are used for different purposes. SBA EIDL financial requirements during the COVID-19 pandemic have been relaxed, in addition to an expansion of eligible borrowers. SBA EIDL’s are capped at $2 million, with a maximum interest rate of 3.75% and maximum term of 30 years.
The State of Michigan will also provide up to $20 million for small business affected by COVID-19. Funds should be available by April 1st in the form of grants (businesses under 50 employees) and loans (businesses under 100 employees). Details on the applications and forms are not available yet.