COVID-19 Pandemic: Federal Aid to Businesses
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The news has alternated between reports about the virus and the economy. Two of the most important features of the CARES Act has been the expansion of several programs that will be administered through the Small Business Administration (SBA).
There are two programs, the EIDL and the PPP. Business owners have to choose one or the other.
EIDL (Emergency Impact Disaster Loan):
This program is administered directly through the SBA itself.
It comes with a $10,000 advance that is supposed to be paid within 3 days of application.
Amounts above $10,000 are a loan that is not forgivable
The terms of the loan are supposed to be 30 years and range from 2.5% - 3.5%
Loans up to $25K do not require collateral, but will require a 'certification'
Loans above $25K will require collateral and the preferred collateral of the SBA is real estate.
Notes on the EIDL:
- The application is relatively straight forward. Here is the URL.
- Per the CPA that our firm uses for continuing education, a nationally renowned expert among experts, he has not heard of a single business actually receiving this money anywhere in the country.
- Because the government kept making changes to the regulations after the laws enactment, applicants have had to reapply multiple times.
The PPP (Paycheck Protection Program):
This program is supposed to fund up to 8 weeks of payroll.
Up to 25% of the funds of this program can be used for rent/mortgage payments or utilities.
This program is forgivable (a grant), unless payroll drops by 2%% or more than 25% of the funds are used for non-payroll purposes.
Non-forgiven funds are treated like a loan.
Unlike the EIDL, the terms of a PPP loan are shorter, about 2 years.
Originally, the interest rate was not supposed to be more than 0.5% but the banks demanded a higher rate.
These funds are administered through banks and it is up to each bank to write its own rules and create its own application.
Many banks are simply not prepared for this.
This program has an expiration date, so if you're thinking about applying, better to apply sooner than later.
If you already applied for, and received funds under the EIDL, you can 'refinance' those funds into the PPP.
This fund is open for businesses, self employed people, and even certain non-profits.
Notes on the PPP:
- Because each bank is administering this fund, it is difficult to know what documents each bank will require.
- There is also a concern that banks will play fast and loose with the forgiveness aspect.
- Some banks have limited who can apply to only existing customers, and of those, only customers with a credit card or loan. This is illegal per the CARES Act and a class action suit against one of these banks has already been filed.
Concluding thoughts:
In the past two weeks, what feels more like two years, I've had several difficult conversations. It's not a cut and dry decision as to which program is better. Careful consideration must be taken to determine which of these programs is right for your situation. And also, the current environment where the rules are changing and good reliable information is scarce makes this already difficult situation into a seemingly impossible one.
I'll conclude with a link to a story by the CPA that I referenced above, Bob Jennings. I refer to Mr. Jennings as the 'Oracle of Indiana' because, aside from the fact that he's from the Hoosier State, he knows what he's talking about. He's been the primary source for good information for our firm for over a decade.
Mr. Jennings wrote a letter to Congress that properly defined a small business as one where the business owner gets up and works in the business, shoulder to shoulder with the staff, and is at full risk for the continued existence of that business. He contrasted the government’s existing definition solely by the number of employees as wholly deficient and not at all in the reality that we - both clients and us (we’re small business owners, too) face. His letter was articulate and passionate. He noted that the SBA has a troubled history of working with small businesses - as we define it, and that to put a program of this scope, importance, and urgency on such a bureau as the SBA would all but ensure that funds would come too little, too late.
I hope this isn’t the case. I hope that the government will get its act together.
And I also know that one can;t run a business on hope alone.
Do the best you can. Apply to both programs, and if you don't like the terms, you can reject the funds. If you get the EIDL first, you can roll that into the PPP. Document everything.
Thank you again for this opportunity to serve.
Stay safe and wash your hands.
Sincerely,
Jonathan Rivlin, CPA
President
The Rivlin Group PC
Disclaimer:
The purpose of this article is for informational/educational use only. No client relationship is intended by virtue of your use of this article. This article cannot be relied on for official advice regarding your specific situation, and is meant only to be general in nature. Because the regulatory environment is so dynamic at this time, it is possible that the content in this article will be superseded. This article was drafted on 9th April 2020.