As an increasing number of small businesses face payroll and other working capital related challenges, many owners struggle to understand the various forms of federal and state aid designed to support them.
Through the CARES Act and various state programs, small businesses can apply for relief in the form of limited purpose assistance loans that are different from other SBA loans. The loans have very beneficial terms and are being made available on a first come, first served basis.
Summary of Relief Programs
The two major CARES Act funded loan assistance programs include: The Economic Injury Disaster Loan Program (EIDL) and the Payroll Protection Program (PPP).
Economic Injury Disaster Loan Program
Through the Economic Injury Disaster Loan program (EIDL), the SBA plans to directly administer loans of up to $2,000,000 to qualified small business applicants.
- Where to apply. Applicants apply directly through the SBA online portal,
- Who’s eligible? Only “small businesses,” defined by the SBA as business with under 500 employees. This includes the typical small business like partnerships and corporations as well as sole proprietors, independent contractors, small agricultural cooperatives, small aquaculture businesses and most private non-profits. Applicants must make a good faith certification promising necessity and how they plan to use the proceeds.
- The 500 employee limit. The 500 employee threshold includes full-time, part-time and certain other status workers but generally does not include independent contractors.
- Approved applicant options. Approved applicants are not required to take the loan.
- Lending criteria. Loan approval criteria includes an applicant’s credit history and repayment ability.
- Use of funds. Proceeds can be used to pay salaries, sick leave, rents, material costs, mortgage payments and certain pre-existing debt.
- Term & repayment. There are no prepayment penalties and no other fees. Interest rates are initially75% for small businesses and 2.75% for nonprofits, on a 30-year term with a 12 month deferment period during which interest accrues.
- Forgiveness criteria. Borrowers may qualify to have a portion of the loan principal forgiven if they can show they used the proceeds in an approved manner during the eight week period beginning on the date of loan origination. Principal eligible for forgiveness includes an amount equal to the proceeds used for payroll, certain mortgage interest (subject to certain restrictions) and certain utility payments during the eight weeks.
- Major advantages over other loans. Applicants can check the box on their application to be considered for a forgivable up-front emergency advance (that acts like a grant for qualified applicants) of up to $10,000. The $10,000 advance available within three to five days of receiving an approved application. The advance does not need to be repaid even if the applicant is denied for a disaster loan and can be direct deposited or mailed via debit card to a qualified applicant.
- Sometimes requires collateral but not personal guarantee. For loan amounts over $25,000, the SBA will require a $100 UCC lien filing and processing fee and a blanket UCC-1 security interest will be filed against all of the business collateral (but not real estate). No personal guarantees are required for loans of $200,000 or less. But personal guarantees are required for loans above $200,000.
- Deadline to apply. EIDL program applicants must apply no later than December 16, 2020, in most states. But remember that funds are limited and the loans are being made available on a first come, first served basis.
Payroll Protection Program
Through a second loan program, the Payroll Protection Program (PPP), the SBA will administer and fund assistance loans of up to $10,000,000 through SBA certified lenders.
- Where to apply. Unlike the EIDL program, the PPP loans are applied for, administered and funded through SBA approved lenders. PPP applicants will be required to show that they were in operation before February 15, 2020 and paid employees or independent contractors.
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- PPP – MN SBA Lender list. For a link to PPP lenders in your area see the SBA website specific to your state. For Minnesota, the page can be found here under the heading “From Our Office > Minnesota Lenders List”
- PPP – WI SBA Lender Locator. A link to more information including an online SBA referral system for Wisconsin applicants can be found on the Wisconsin SBA District Office website, here: https://www.sba.gov/offices/district/wi/milwaukee.
- Who’s eligible? Only “small businesses,” defined by the SBA as business with under 500 employees. This includes the typical small business like partnerships and corporations. Unlike the EIDL, the SBA will not begin accepting applications from independent contractors and the self-employed until April 10th and may impose additional requirements on independent contractors, sole proprietors and the self-employed. Applicants must make a good faith certification promising necessity and how they plan to use the proceeds.
- The 500 employee limit. The 500 employee threshold includes full-time, part-time and certain other status workers but generally does not include independent contractors.
- Approved applicant options. Approved applicants are not required to take the loan.
- Lending criteria. Loan approval criteria includes an applicant’s credit history and repayment ability.
- Use of funds. Proceeds can be used to pay salaries, sick leave, rents, material costs, mortgage payments and certain pre-existing debt.
- Term & repayment. There are no prepayment penalties and no other fees. The SBA has initially set the rate at a fixed 1.0% on a two-year term. The SBA has provided an information sheet summarizing additional criteria here: https://home.treasury.gov/system/files/136/PPP–Fact-Sheet.pdf. It periodically releases additional guidance and rate information on its website including its Q&A page available here where applicants can also sign up for email updates.
- Forgiveness criteria. Borrowers may qualify to have a portion of the loan principal forgiven if they can show they used the proceeds in an approved manner during the eight week period beginning on the date of loan origination. Principal eligible for forgiveness includes an amount equal to the proceeds used for payroll, certain mortgage interest (subject to certain restrictions) and certain utility payments during the eight weeks.
- Major advantages over other loans. Because only the EIDL program offers the $10,000 advance, the major advantage under PPP is the larger single borrower limit. Both the EIDL and PPP programs are designed to work in tandem so that applicants who first qualify for an EIDL loan would have the EIDL loan amount, less any forgiven EIDL advance/grant, rolled into the PPP loan amount.
- Sometimes requires collateral but not personal guarantee. In contrast with the EIDL loans, PPP loans will not require collateral. No personal guarantees are required.
- Deadline to apply. Applicants technically have until the PPP program ends on June 30, 2020 to apply, but funds are limited and the loans are being made available on a first come, first served basis.
In addition to the federal programs outlined above, Minnesota has a significant aid program of its own that small business may be able to use in tandem with the federal aid. Wisconsin offers information resources and certain tax relief.
Minnesota and Wisconsin Relief Programs
- Minnesota’s relief programs. Depending on eligibility, your business may be able to take advantage of both the federal and Minnesota program: Minnesota Small Business Emergency Assistance. A detailed overview and instructions related to Minnesota’s assistance loans (generally with a single borrower range of $2,500 to $35,000) and other Minnesota Employment and Economic Development department resources can be found here : https://www.careerforcemn.com
- Minnesota Loan Guarantee Program. In addition to emergency loans, Minnesota also has a loan guarantee program for loans up to $200,000 for businesses with under 250 employees.
- Wisconsin resources. More information about Wisconsin’s Small Business 20/20 program including grants available through approved Community Development Funds, Wisconsin’s sales tax and other state tax relief along with other Wisconsin resources (which largely point to federal level SBA relief) can be found here: https://wedc.org/programs-and-resources/covid-19-response/
Summary of Other Non-Lending Aid
- Federal Tax Relief; refundable credits and deferment of payroll taxes. Employers, including nonprofits, who are not receiving funding through the PPP, may for a limited time (ending December 31, 2020), seek to qualify for a refundable payroll tax credit based on the extent to which they have suspended operations as a result of a government order that limits commerce, travel or group meetings, or where the company has seen a drop in year-over-year gross receipts by more than 50%.
Tax counsel should be consulted to assess eligibility for the credit on the basis of whether an employee was furloughed or faced reduced hours and for more information about limitations that may apply to employers with more than 100 employees. The credit generally applies to the first $10,000 in wages and compensation paid by the employer to an eligible employee, not counting payroll credits for required paid sick leave, medical leave or extended leave under the FFCRA.
- Deferment of Payroll Taxes. In addition to tax credits, and again for businesses not taking advantage of PPP funding, your CPA should also discuss with you the extent to which you may be able to defer payment of the employer portion of certain payroll taxes through 2020 and the consequences of the resulting payment requirements that consequently extend payment into 2021 and 2022.
Our Pledge
At Lommen Abdo, P.A. we are committed to understanding your unique circumstances. We look forward to working with you as you face the many challenges impacting family, management and ownership. We can help you enhance your state of readiness and we have decades of experience in positioning our clients to make the most of the coming recovery period, which will be rich in opportunity for those prepared to meet it.
For more information, contact Bob Abdo at 612.336.9334 / rabdo@lommen.com or Glenn Kessel at 612.336.9338 / glenn@lommen.com in Minnesota. In Wisconsin, contact Brent Johnson at 715.381.7104 / brent@lommen.com.