In March 2020, Congress passed the CARES Act, a $2 trillion stimulus package designed to lift the United States out of economic turmoil brought about by COVID-19. The Act is specifically targeted at helping small businesses whose operations have been drastically impacted by the spread of coronavirus across the country and the world. The relief package includes $349 billion for COVID-19 small business loans.
The Paycheck Protection Program (PPP)
A promising portion of the Act is called the Paycheck Protection Program, which provides up to $10 million in financial relief for costs, including payroll, overhead, rent, utilities, and other expenses related to job retention. The PPP is specifically designed to ensure employers can continue to pay their employees as the coronavirus pandemic spreads.
Paycheck Protection Program loans will have a low fixed interest rate of 1%, and some or even all of the loan may be forgiven completely. A PPP loan used for the purposes previously listed—payroll, utilities, etc.—will likely be eligible for complete forgiveness, as long as companies are able to keep their employees on through the end of June 2020.
The CARES Act is in the sights of small business owners and promises welcome relief—but there is high demand for the funds, which were scheduled to be available starting April 3, 2020. In troubling economic circumstances (including unemployment numbers in the millions and small businesses shuttering their stores, in many cases for good), companies are virtually lining up to receive government assistance to stay afloat.
As PPP loans are designed to help small businesses succeed in a period of such uncertainty, the requirements are much more lax than other SBA loans. But do you know if your small business will qualify to receive a PPP bailout loan? Here are 3 reasons why you might not qualify for the newest government assistance and what to do if you find yourself in this situation.
1. Your Company Has More Than 500 Employees
The PPP wants to ensure that employees are paid their full salaries even if their small business employers are struggling with the fallout of the coronavirus pandemic. Congress has defined a small business under the CARES Act as one with fewer than 500 employees—whether full-time, part-time, or another employment status. Companies can also be private nonprofits or 501(c)(19) veterans’ organizations with fewer than 500 employees.
This stipulation will probably not affect most small businesses who seek to benefit from the government stimulus package, as 47.5% of US workers are employed by small businesses with fewer than 500 employees. But if your business is the exception and you do have more than 500 employees, you will not be considered a small business and will thus be ineligible for a PPP loan.
2. You Need a Loan for Costs Unrelated to Payroll
As it’s called the Paycheck Protection Program, the bulk of each loan is meant to cover payroll-related costs. The PPP considers payroll costs to include the following:
- Salary, wages, tips, and commissions (capped at $100,000 annually per employee)
- Employee benefits including family, medical, parental, or sick leave; health insurance premiums; and retirement account benefits, such as 401(k)s and IRAs
- State and local taxes
- Self-employment income, commissions, and wages (capped at $100,000 annually per employee) for independent contractors and sole proprietors
While you are not required to use the entire loan amount on payroll expenses, no more than 25% of the forgiven amount can be used for non-payroll purposes such as rent or utilities. If you don’t plan on using the majority of your PPP bailout loan to cover payroll expenses, you will not be eligible.
3. Your Business Hasn’t Been Directly Affected By Coronavirus
Unfortunately, almost all companies, regardless of industry or size, have experienced slowed business because of the coronavirus pandemic. But if your business is one of the lucky exceptions and you cannot prove that you require government assistance to continue operating as usual because of COVID-19, you will not be eligible for a PPP loan.
What Other SBA Loan Options Are Available?
Even if your business doesn’t meet the requirements for the government’s new economic stimulus package, there are other SBA loans available. This is an unprecedented time, and lenders are looking for ways to help small businesses out and heave the economy upward. Here are some alternative loan options if your business doesn’t qualify for complete loan forgiveness under the PPP bailout:
- Economic Injury and Disaster Loan (EIDL): $10 billion of the CARES Act is set aside for the EIDL. Through this loan, borrowers can take out up to $2 million instead of $10 million with the PPP. Three days after applying for this loan, borrowers are granted a $10,000 cash advance, which does not need to be repaid. However, the remainder of the loan is not forgivable. This loan can go toward payroll expenses, rent or mortgage payments, production costs, and more, which makes it a bit more flexible than the PPP.
- Other SBA options: SBA Debt Relief, 7(a) program, SBA Express Bridge Loans, Express Loan Program, Deferred FICA Tax, and Net Operating Loss
Additional COVID-19 Loans for Small Businesses
If you are not eligible for any of the SBA loans currently available, you are not out of options. This is a challenging time for American small businesses, but interest rates are low, and there are a plethora of coronavirus small business loan options available. Small businesses experiencing harmful economic effects of coronavirus should act now to secure their funding and ensure they come out of this pandemic with a strong bottom line and confident team of employees.