What We Know About the Stimulus Bill In Response to COVID-19
By Bryan Hoban, PECAA Business & Financial Advisor
The Senate and House have passed the $349 billion stimulus bill called The CARES Act. Much still remains to be seen and many questions remain. We have received a number of technical questions on the bill that we won’t know answers on until the Treasury & Small Business Administration provide guidance for banks who will be participating in the program. The government wants essentially every bank to participate, even those who traditionally don’t offer SBA 7(a) loans. While it is a great idea to reach out to your local bank and make contact with your lender, they will likely have very little details at this point in time. They still need details on how the application process will work.
Here is a summary of what we know so far about the package. There are currently two SBA options available:
- SBA disaster loan is available directly through the SBA right now with no commercial bank involvement. Please visit sba.gov/disaster for the online application. Loans available at 3.75% and up to 30 year terms. This program does not have any forgiveness options that we are aware of at this time.
- SBA (7a) loan. Many of you may have used this product before. This stimulus version will likely be a much different experience. Relaxed underwriting standards and much quicker turnaround than one would typically experience. These loans will be done through a commercial bank and interest rate will be no higher than 4%. This is the loan that features forgiveness if funds are spent on qualifying expenses (payroll, rent, etc.). Non-forgiven funds are paid off over a 10 year period.
At this point, the disaster version is fairly straightforward. One can begin the application process for the disaster loan while you wait for final passage and details on the 7(a) loan. There is no penalty for applying and not accepting the disaster loan. Once the Treasury and SBA pass along guidance to banks, the application process for the 7(a) loans will be available. Treasury Secretary Steven Mnuchin has said that “by the end of next week, we will have a very simple process where these can be made and disbursed in the same day.” (This quote is from the following Wall Street Journal Article) That sounds a little quick to me, so I wouldn’t suggest making your business plans around that timeline until we have confirmation on this.
LOAN DETAILS AND FORGIVENESS
The loan amount will be determined by a formula based off historical payroll. Further clarification is needed here, but appears that it will either be 2/15/20 payroll, or average payroll from 2/15/19-6/30/19. This amount will be multiplied by 2.5 to determine the loan amount. If proceeds are used to cover payroll & payroll costs, benefits, rent, utilities and interest on existing business mortgages or other debt over a period of 8 weeks following the loan origination date, the spent amount on these expenses would qualify for forgiveness. The caveat is based on the number of employees and level of payroll maintained/rehired for this 8 week period. An example is if loan amount is based off payroll for 10 employees, but during the 8 week period following loan origination, only 9 are retained, the practice would only be eligible for forgiveness of 90% of the loan amount. The remaining 10% will need to be repaid over time. Additional provisions include total payroll level. So if employees are retained, but pay or hours are reduced, some of the loan becomes unforgivable. We will need to wait for further guidance from the SBA with full details on how this process will work. A few details/unknowns:
- If you have or are about to lay off/furlough employees, that is not an issue. As long as they are re-hired by the loan origination and retained through the 8 week measurement period, you will qualify for forgiveness.
- It is not clear if the same employees need to be retained. For example, if you had 6 employees, but decided 2 would not be re-hired, but rather made hires of 2 new employees to replace them. We will need further details to see if this would still qualify for full forgiveness.
- No payments will be required for 6-12 months.
- Any unforgivable balance will be termed out for 10 years.
- There is no prepayment penalty (payment made on unforgivable balance before the loan is due)
- There appears to be no loan fees or collateral requirements
- No personal guarantee is needed if funds are used for the qualifying expenses laid out above.
- For measurement of payroll expenses in regard to owner compensation, the amount is capped based on annual pay of $100,000
While it appears that this loan is meant to be a straightforward application process, we still recommend pulling together the following information, just in case. This will likely make you well over-prepared, lenders are going to be overwhelmed with requests once applications are open.
- Payroll & benefits data (this is likely the most important piece of information to provide)
- Have data for 2019 and 2/15/20 (remains to be seen exactly what they will want)
- Last 3 years tax returns
- YTD P&L (include last year’s YTD comparison if possible)
- Determine your average operational costs for 2019 (as described above)
- Gather your personal current bank, investment, retirement, and loan amounts as you will be required to fill out a Personal Financial Statement.
- Records of historical and expected go-forward rent, utility and interest amounts.
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