Applying for SBA Loans

I have heard that the application process has had its fair share of hiccups. I, personally, have had to apply to two different banks. The first bank I applied to was initially happy to help me and then changed their policy to only work with pre-existing clients. Fortunately, I have a line of credit through another bank so I was able to apply through them. I don’t hold banks responsible for this confusion. I’m sure they are grappling with the federal government and a system that previously only handled 60,000 loans a year. I’m sure that the number of applicants is staggering.

In any case, I wanted to take a chance to walk you through the types of things you should expect to see on the application. If you need additional help, please don’t hesitate to call us. We are available to provide assistance.

How much can you apply for through the SBA loan?

Your payroll expenses are the focus of most of the documentation required by the application. That is because the amount of the loan is based on your payroll. You average your payroll expenses over the last year and multiply that times 2.5. That is the amount of loan you are qualified to take.

What if you are self-employed and don’t take a salary? My understanding is that you do not count towards your payroll expenses. However, employees and 1099 independent contractors do.

You will need to provide documentation as to your payroll expenses. You will need to submit a 2019 W-3 and/or a Form 940. Both of those show your payroll expenses for 2019. They may also ask for monthly payroll summaries.

What can I use the funds for?

The funds can be used to pay payroll, mortgage interest, rent, and utilities for 8 weeks following the issuance of the loan.

You cannot reduce your workforce or reduce workers’ salaries by more 25% between February 15 and June 30. If you do, you must rehire your staff before June 30, 2020.

If you follow the guidelines, the principle of the loan can be forgiven. I don’t consider this a guarantee, and please note that the interest is not forgivable. The interest rate I have seen varies. I have seen as low as 0.5% and the law says not to exceed 4%.

What other documents should I have?

One application I saw required general business documents including Article of Incorporation, By-Laws, and Partnership Agreements. However, not all applications require that information.

Some lenders may request a profit and loss statement and/or a balance sheet. I have also seen requests for 2019 corporate tax returns. Depending on the size of your company, they may also request personal returns. Though, to be clear, I have seen no requirement that you provide a personal guaranty for the repayment of the loan.

Are these SBA loans free money?

Not necessarily. I am a firm believer that there is no such thing as a free lunch, and I would not assume that this money has no strings attached. First, the government has outlined very specific things that much be done to qualify for forgiveness (like not laying off workers). Second, the interest is definitely not forgivable.

The fact is that even if you do everything correctly, the loan MAY be forgivable. The language in the statute says that you will qualify for forgiveness, but I’m not sure what that means. My advice is to take the money with the understanding that it may not be free and clear from other requirements.

All that said, I think the SBA loan is a good option for all companies struggling during this time. Frankly, my office is requesting a loan as well. I think it’s a smart move in a very uncertain economy.

The CARES Act

There has been a lot of confusion surrounding the SBA loans available through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. I admit that I don’t know how it will all work, yet, but I thought I would share what the law actually says and some of my thoughts on it.

SBA Loan Program

The main topic has been the loan program. These loans differ from the disaster loans previously available through the SBA because these loans are potentially 100% forgivable (the principle, that is).

Any business with fewer than 500 employees is eligible. The loans are capped at the average monthly payroll costs per month times 2.5. The average monthly cost is considered over the last year, but it is capped at $100,000 per employee.

The loan is forgivable if it’s used to pay payroll, mortgage interest payments, rent, and utilities. Only the original principle is forgivable, and I have seen differing numbers on the amount of interest. The Act says interest not to exceed 4%, but I have been quoted less. The term for repayment of anything not forgiven is not to exceed 10 years.

Forgiveness is not guaranteed, however. Between February 15, 2020, and June 30, 2020, if a business reduces the number of employees or decreases their pay by more than 25%, the loan may not be forgiven. If layoffs have already occurred, businesses are allowed to rehire before June 30, 2020.

All of this is different from the SBA Economic Injury Disaster Loans that were previously offered, but my understanding is that those loans can be refinanced or included in a forgivable loan.

Tax Benefits

I am not a tax professional so I will not try to pretend to be one. Here is my understanding of what is offered:

Businesses can defer their payroll taxes between March 27, 2020, and December 31, 2020. Those deferred payments are due in two installment payments: 50% on December 31, 2021, and 50% on December 31, 2022.

The treatment of Net Operating Losses, business interest, and Alternative Minimum Tax Credits has changed. I am not going to try to explain these things. Talk to your CPA.

Relief for Individuals

Unemployment benefits have received a boost from the federal government. If an individual has used all of their state-based unemployment benefits, they can receive the same, continuing benefits for an additional 13 weeks. In addition, employees are eligible for an additional $600 per week for up to four months.

Rebates are being offered, as well. The government is sending $1200 per person with an adjusted gross income of less than $75,000. The AGI will be taken from your 2019 taxes, or if they haven’t been filed, from your 2018 taxes. Individuals will also receive $500 per child. These are being called an ‘advance refundable tax credit.’ My understanding is that they will not need to be repaid.

All payments for federal student loans are suspended. Any missed payments will not be reported to credit agencies. I saw nothing about whether interest is being forgiven. My guess is that interest will continue to accrue, much like what we are seeing with rent and evictions.

Borrowers facing financial hardship can request forbearance for any federally backed mortgages. The forbearances can be granted for a period of up to 180 days with another extension of 180 days. No fees or interest will be charged during that time. There is also a stay on foreclosure actions for 60 days beginning March 18, 2020.

Individuals may also remove up to $100,000 from their qualified retirement plans without penalty. Those funds will be subject to income tax, but the tax can be spread over three years beginning with 2020.

There are other benefits available, but I only wanted to hit the big issues.

What does it all mean?

The SBA loans seem like an obvious choice for most small businesses, but I have some concerns. For example, if, like many businesses, you have already laid off workforce due to the slowdown, you may be in a strange situation where you will need to rehire those employees before June 30, 2020, with or without an economic improvement.

I’m also not clear on the interest rates being offered, nor is it clear when these funds will actually make it to businesses in need. I have been in contact with some commercial lenders and they all seem a bit uncertain about the process.

I’m not clear on the benefits of the tax provisions. The deferred payroll tax seems favorable, but the taxes will still be due. I will need to discuss with a CPA to get a better idea of how these provisions work together.

For individuals, there will more funds available for unemployment benefits and checks will be sent directly to people in need. Those benefits are great, but no word on when money will be available. I have no idea how the unemployment applications are being handled, especially given a reduced workforce. The number of applicants is unprecedented. No word on the timing of those payments. The rebates should be directly deposited by April 15, but the paper checks will be delayed through the summer. All great measures, but will they get to people in time?

Bottom line is that there are a lot of unknowns in all of this. I will do my best to update this as things progress. If you are a business considering an SBA loan, please feel free to contact us. We are currently helping businesses navigate the application process, and we’d love to help.

The Families First Coronavirus Response Act

The Families First Coronavirus Response Act was signed into law on March 18, 2020 and goes into effect on April 1, 2020. Many business owners are concerned about its provisions and how it will affect their employees. Below is a summary of what I have read online. I’m not covering all provisions. I’m focusing on the provisions that most affect small and medium-sized businesses.

Emergency Family and Medical Leave Expansion Act

This is Emergency FMLA leave that is triggered differently than normal FMLA leave. As a refresher, normal FMLA leave requires that the employee work for the business for at least one year and have worked at least 1250 hours in the last year. That employee would be eligible for up to 12 weeks of unpaid leave with their job held until they return.

This act creates Emergency FMLA leave. To qualify, an employee must only have worked at least 30 days for an employer, that employer must have less than 500 employees, and the employee must have a qualified need. Qualified needs include the inability to work because the employee needs to stay home to care for their child because the child’s school or daycare has been closed.

Qualifying employees are entitled to up to 12 weeks of leave. That leave will be paid at not less than 2/3 of the employee’s salary. The employer is responsible for paying those employees.

There is one provision that potentially changes everything. The Secretary of Labor has the power to exclude businesses with fewer than 50 employees if compliance with the law would jeopardize the viability of the business.

This creates considerable concerns for employers who have employees with children. There is talk that schools in Illinois may be closed for the remainder of the school year. That means that many employees may qualify for this emergency leave.

But do they actually qualify? I think it’s a bit of a hard question. For example, what of an employee has children at home, but their spouse is also at home? Do they qualify? No concrete answers, but I think there is a strong argument that the employee would not qualify because they do not need to stay home because another adult is home to care for the children.

Further complicating things is the ability of the Secretary of Labor to exclude small businesses where compliance would jeopardize the viability of the business. What business would not be jeopardized by having to pay workers who aren’t producing value for the company? It seems like these provisions would have to be enacted for many businesses, but we have no guidance as to whether anyone will be excluded.

Emergency Paid Sick Leave Act

This is emergency paid sick leave that is available to employees at the employer’s expense. It states that employers must offer 80 hours of paid sick leave to qualifying employees.

There are two bases for qualification. First, if the employee is sick. There are not nearly enough tests for determining whether someone has COVID-19 so a sick employee is anyone that has been told to self-quarantine. I don’t believe a stay-at-home order is the same as a self-quarantine order, but I am yet to be told I am right.

Second, an employee qualifies if they must stay home to care for a child who is home due to school closures. Essentially the same qualifications as the Emergency FMLA leave.

Note, workers who can telework must do so. This also only applied to businesses with fewer than 500 employees, and companies with fewer than 50 employees are subject to exclusion by the Secretary of Labor.

Conclusion

If you have employees who have children they must care for (or are themselves sick), you will be obligated to pay them two weeks paid sick leave followed by 10 weeks of Emergency FMLA paid at 2/3 of their salary.

This went into effect on April 1, 2020. Employees still have to claim leave under the act so your business may not be affected until employees are aware of their benefits (you are also required to post a notice). However, I think most businesses will need to move quickly to assess their liability associated with this act.

The next question is how does this interact with the stimulus. More on that next week!

If you have any questions about these provisions, please feel free to contact us for more guidance!