CARES Act: Cash Flow Opportunities

Much confusion and uncertainty surround the COVID-19 crisis and how business owners can obtain financial support from the different Government relief packages that have been passed. The most recent piece of legislation – the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law by President Trump on March 27, 2020, and provides a substantial temporary revamp of small business loans.

As advisors of small to medium-sized businesses, we see many of our clients struggling with how they will find the cash to help them get past this pandemic. To help clients and others, Klatzkin has provided a summary of key program details of the various types of funding programs available to small and medium-sized businesses through the CARES Act, on both the national and state-specific (New Jersey and Pennsylvania) levels.

Economic Injury Disaster Loans

Economic Injury Disaster Loans (EIDLs) are a Small Business Administration (SBA) product that has been around for other natural disasters. However, because COVID-19 constitutes a national emergency, businesses in every state are eligible to apply for these loans.

• Loans are up to $2M, with a term of 30 years, interest rates are 3.75% for small business and 2.75% for nonprofits, and the first month’s payments are deferred for a full year from the date of the promissory note.
• EIDLs can be approved by the SBA based solely on the applicant’s credit score
• EIDLs smaller than $200,000 can be approved without a personal guarantee
• Borrowers can receive $10,000 in an emergency grant cash advance that can be forgiven in spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue losses.

If you decide to pursue an EIDL, you will need to have some financial information and supporting documents at the ready to submit with the loan application. This may include two to three years of tax returns, last year’s financial statements, a year-to-date financial statement, property leases, and a personal credit score. You can apply for these loans directly through the SBA.

Paycheck Protection Program:

Through the Paycheck Protection Program, banks make the loans, as well as credit unions and some other lenders, all of which are 100% guaranteed by the SBA.  Eligible borrowers are any business, nonprofit, veteran’s organization, or tribal business with less than 500 employees.

Self-employed, sole proprietors, freelance, and gig economy workers are also eligible to apply (if in operation prior to February 15, 2020).

• Loans are given up to a maximum of the lesser of $10M or 2.5 times the average monthly payroll costs – including wages for employees making under $100,000, as well as expenses paid for sick leave, healthcare, and other benefits during the one-year period before the date on which the loan was made. Employees making over $100,000 are limited to $100,000 of salary for the monthly payroll cost calculation.
• Permissible uses of the proceeds include most employee-related expenses, interest payments on mortgages, rent, utilities, and interest on existing debt.
• The loan term is up to 10 years with a maximum interest rate under this program set at 4%.
• Complete payment deferrals are available for six months to one year under a deferment process set by the SBA.
• Part of this loan may be forgiven and not counted as income to you if it’s spent during the first eight weeks on operating expenses.

Loans are forgiven when the proceeds are used for any of these costs:

• Payroll costs, excluding prorated amounts for individuals with compensation above $100,000
• Interest payments on a mortgage if the mortgage was incurred before February 15, 2020 (does not include the principal or prepayment)
• Rent payments under a least that was in effect before February 15, 2020
• Utility payments made on utility services if such services were in use before February 15, 2020.

Business owners should take special care because there are certain limits on the amount of forgiveness for this loan. You must maintain the same average number of employees for the first eight-week period beginning on the origination date of the loan as you did from February 15, 2019 – June 30, 2019, or from January 1, 2020, until February 15, 2020. However, you won’t be penalized for a reduction in employment or wages during the period from February 15, 2020, to April 26, 2020, if you rehire employees that you previously laid off or restore any decrease in wages or salaries by June 30, 2020. Certification is necessary from an authorized representative that all information presented is true and correct to request the loan. To seek forgiveness, a borrower will submit to the lender an application including documentation verifying employment and payroll costs, documentation verifying mortgage interest, rent payments, and utility payments and certification from an authorized representative that all information is accurate and correct. The lender will have 60 days from submission to issue a decision on the application.

New Jersey Economic Development Authority (NJDEA) Grant and Loan Programs

Small business emergency assistance grant program – will provide grants up to $5,000 to small businesses in retail, arts, entertainment, recreation, accommodation, food service, and other services – such as repair, maintenance, personal, and laundry services.

Small business emergency assistance loan program – will provide working capital loans of up to $100,000 to businesses with less than $5M in revenues.

NJ Entrepreneur Support Program – Provides 80% loan guarantees for working capital loans to startup entrepreneurs.

Small business emergency assistance guarantee program – Provides a 50% guarantee on working capital loans and waive fees on loans made through institutions participating in NJEDA’s existing programs.

Pennsylvania Industrial Development Agency

Small businesses with 100 or fewer full-time employees have the opportunity to apply for a $100,000 low-interest loan. Qualifying businesses will need to verify that over the past three months, they have spent an amount equal to their loan request on direct business expense — payroll, utilities, rent, debt, and inventory, etc. — up to the maximum $100,000 loan amount. The interest rate ranges from 0%-3%.

If you have questions about the information outlined above, need assistance pursuing any of the options, or with any element of business continuity, Klatzkin can help. For additional information,  click here to contact us. We look forward to speaking with you soon.