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COVID-19 Emergency Loans for Small Businesses: What You Need to Know

Toby Graham /

Don’t let your business become a casualty of the COVID-19 (coronavirus) pandemic. If your organization is having trouble generating revenue or making payroll right now, there’s a good chance you’re eligible for financial assistance.

In late March 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The law is the largest economic stimulus package in American history, providing $2 trillion to individuals and organizations.

A sizable chunk of that $2 trillion is going towards small businesses. Under the CARES Act, any company with fewer than 500 employees can apply for up to $10 million through a loan guaranteed by the Small Business Administration.

The kicker? These loans may be forgivable—meaning you might not have to pay back what you borrowed. Here’s what you need to know about harnessing this historic economic opportunity.

Is my business eligible for a COVID-19 emergency loan?

If you have fewer than 500 employees, you’re probably eligible. This includes 1-person businesses—i.e. self-employed individuals such as gig workers, freelancers, and sole proprietors. There are exceptions, but there are also special cases in which a business with more than 500 workers may be eligible. Note that all employees (full-time, part-time, and others) are included in the 500-person count.

What kinds of loans are we talking about here?

These are basically pumped-up SBA 7(a) loans.

A 7(a) loan is guaranteed by the SBA but provided by a third-party lender. In other words, you’re not borrowing directly from the government but taking out a loan with a bank or other private capital source, with the government cosigning.

Prior to the COVID-19 pandemic, 7(a) loans were capped at $5 million and had a number of restrictions. The CARES Act doubles the maximum amount and loosens the eligibility requirements.

How much can I borrow?

You may be able to borrow as much as $10 million, but most businesses will receive less than that. The maximum amount you can apply for is equivalent to 2.5 times your business’s average monthly payroll costs.

Not all expenses related to paying workers are considered payroll costs under this law.

Here’s what IS included:

  • salaries, wages, commissions, or similar compensation;
  • payments of cash tips or equivalents;
  • payments for vacation, parental, family, medical, or sick leave;
  • allowances for dismissal or separation;
  • payments required for the provisions of group health care benefits, including insurance premiums;
  • payments of any retirement benefit;
    and
  • payments of state or local tax assessed on employee compensation.

Here’s what is NOT included:

  • compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the period February 15, to June 30, 2020;
  • payroll taxes, railroad retirement taxes, and income taxes;
  • any compensation of an employee whose principal place of residence is outside of the United States;
    and
  • qualified sick leave and/or family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.

To determine how much you can apply for, find the total average monthly amounts of your included and excluded costs in 2019 (or the averages amounts of January and February 2020 if you weren’t in business in 2019)*. Next, subtract your average total monthly excluded costs from your average total monthly included costs. Finally, multiply the remainder by 2.5—that’s your maximum loan amount.

payroll costs [included avg. monthly payroll costs in 2019 – excluded avg. monthly payroll costs in 2019] x 2.5 = maximum loan

*If you run a seasonal business, you must calculate your averages over the period beginning February 15, 2019 or March 1, 2019 (you can choose either date) and ending June 30, 2019.

But I have to pay it back, right?

Maybe not. This is the truly extraordinary part of the COVID-19 relief plan. The SBA may partially or completely forgive your loan as long as you spend the money on one or more of the following:

  • payroll costs (the same as in the included category outlined above)
  • interest on a mortgage obligation
  • rent on a leasing agreement
  • payments on utilities (electricity, gas, water, transportation, telephone, or internet)
  • additional wages paid to tipped employees

The government is incentivizing you to run your business as close to “normal” as possible. Note that if you reduce your workforce or the wages you pay employees, the SBA will forgive less of the loan.

What are my chances of qualifying?

Whether you receive a loan is ultimately up to the institution offering it. Criteria vary from lender to lender. However, given the broad impact of the pandemic and what’s at stake, many businesses (including those with less-than-stellar credit) can expect to receive assistance.

According to the SBA, lenders are largely looking for the following:

1. that the loan request is “necessary to support ongoing operations” during the COVID-19 crisis;

2. that you’ll “use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments”;

3. that you don’t have an identical or similar loan application pending elsewhere;
and

4. that you haven’t already received an identical or similar loan covering business expenses in the period between February 15, 2020 to December 31, 2020.

If your business can prove all the above, your lender has good reason to offer you a loan. Unlike in usual circumstances, it doesn’t matter if you don’t have collateral or a personal guarantee, or if you recently applied for a loan and were turned down.

How soon will I receive the money?

As of this writing, loans are on track to become available starting Friday, April 3rd.

Do I have other options?

Yes. You can also apply for up to $2 million in disaster relief through a separate loan with the SBA.

Additionally, there are several alternatives available:

However much you need, and whatever option you choose, now is the time to act. Your employees, customers, and community are counting on you.

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