The federal government enacted in late March legislation to help small businesses suffering from the COVID-19 crisis. The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) provides for the availability of $349 billion in Small Business Administration (SBA) loans.
There are currently two types of loans available: Economic Injury Disaster Loans (EIDL) and Paycheck Protection Loans (PPP).
The goal of the government was to get these loans into the hands of business as quickly as possible. But there have been delays in implementing the processes for issuing these loans. The overwhelming majority of businesses have not received any funds.
Two issues have caused the holdup: First, banks are concerned that the regulations aren’t clear enough, and they need protection against fraud and (without expressly saying it) bad debt at the end of this crisis. Second, the process requires the SBA to review all loan applications and it is dealing with an unprecedented volume.
The following are the top 10 questions and answers about these loans:
1. What is the status of the PPP loans?
On a call with Vice President Pence and SBA Administrator Jovita Carranza, hosted by the NFIB on April 7, 2020, Carranza stated that banks have held up disbursing funds as they wait for more clarity on loan guaranties and other regulations around the CARES Act. Banks are concerned about fraud as they claim the PPP loans don’t require the usual amount of background information or creditworthiness that come with conventional loan applications.
Former Fed Chair Janet Yellen told members of Congress this past week that banks need a “safe harbor” to protect them against fraud claims. The bankers have told the government that there’s also a need for a slower process with more due diligence.
2. When can I reasonably expect the loans to be funded?
At this point, it is impossible to tell, but likely it will be a longer time frame than expected. If the banks do not receive some kind of assurance or “safe harbor” against future liability, they may sit on some applications or funds. And, perhaps more important, the SBA has to review the applications and approve them before banks can write promissory notes and release funds, and that could cause major delays.
In a typical year, the SBA processes about 1,000 loan applications for $20 billion; to date, approximately 250,000 PPP loan applications for the $349 billion program have already been filed. While the SBA is trying to outsource and ramp up, it could take weeks or longer.
3. What process are lenders going through to approve loans?
Each lender was able to set up their own process and requirements for loan applications. For example, BB&T and SunTrust, now Truist Bank, set up an online portal to receive applications. It required a Borrower Application Form, 2019 tax returns, proof of payroll, and IRS Form 944, among other documentation.
In an email to customers, the bank stated that it is reviewing applications in the order received and that the SBA also needs to review the applications, something that is out of the bank’s control. In addition, it stated that if more documentation was necessary, the customer would need to provide it. At that point, they may be moved to the end of the queue of applicants due to the delay.
4. Should I apply for the PPP loans through multiple banks and see which one is faster?
At this point, most banks are only taking applications from existing customers due to the fraud concern, so this isn’t even possible. If banks open up to non-customers, it is still not advisable to submit multiple applications. The regulations only allow for one PPP loan per business, therefore, applying through multiple banks could cause confusion or even fraud alerts down the line.
Due to this requirement, the regulations recommend applying for the maximum loan amount. The best bet is to try to communicate directly with your bank’s representative via phone or email for more guidance.
5. What happens to the loan forgiveness if I have to lay off employees (or already have)?
It is important to remember that the main purpose of the CARES Act as outlined in the regulations is to keep workers on the payroll. The forgiveness portion covers 8 weeks of estimated payroll costs multiplied by 2.5. The regulations do provide that 25% of the loan can be used for other expenses like mortgages, rent, utilities, and health insurance, and still be forgiven.
Therefore, if a business is forced to lay off employees or already has and doesn’t rehire them, the loan amount not used on payroll or approved expenses must be repaid over two years at 1% interest. This also makes banks nervous as they see a scenario in which businesses don’t use the PPP loans for payroll as envisioned, still go under, and can’t repay the loans.
While the CARES Act provides that the SBA will guarantee the loans and cover lenders, there could still be allegations of writing bad loans and litigation down the line. This could leave banks holding more bad debt than they can tolerate, such as happened in 2008.
6. When do I start tracking the 8 weeks of payroll that will be forgiven in the PPP program?
According to guidance issued by the Department of Treasury on April 2, 2020, the eight-week period begins on the first day lenders disperse funds to businesses. This regulation also noted lenders should issue funds no later than 10 calendar days from the date of loan approval.
7. What is the status of the Economic Injury Disaster Loans (EIDL) $10,000 grant? It’s been longer than three days and I haven’t received it.
The main issue here is whether every business and independent contractor even qualifies for this grant. In a case of “too good to be true,” it’s been reported that the SBA will only provide $1,000 per employee up to 10 employees, not $10,000 for each business. It might also look at revenue as part of the calculation.
In addition, the EIDL loans claimed the upper limit is $2 million, but again due to high demand that number may be lowered to $15,000 per company. There has been no final guidance on this but, suffice it to say, whatever grant is allocated, it will not be in any business’s bank account within three days. If you have applied for an EIDL loan, you can theoretically check the status with SBA by email at disastercustomerservice@sba.gov. But emails to this address have gone unanswered to due to the high volume of inquiries.
8. Can independent contractors apply for PPP loans?
The short answer is yes. The law clearly states that businesses cannot include independent contracts in their payroll calculations, and also that independent contracts can apply separately for the loans. April 10, 2020, was the first day that independent contractors could apply for the loans.
9. What is the process for independent contractors applying for PPP loans?
Despite efforts to simplify the process for America’s 23 million independent contractors, it is the same as regular businesses. Independent contractors should contact their bank to begin the application process immediately. Fintech companies are also being certified for the loan program, which may be a better option for independent contractors.
Since independent contractors do not have a payroll, they can calculate their loan amount by using their Schedule C on their tax return; their net revenue, calculated as income minus expenses, will constitute the yearly income number. Independent contractors can document their income with 1099 forms, bank records, and tax filings. And, while more regulations are necessary, they can use the loan to pay themselves even if their revenue is zero, and can have the loan forgiven.
10. Will this program run out of money?
The PPP loans are “first come, first served.” Clearly, this initial round of $349 billion will not be enough to address every loan application. That being said, the Trump Administration and Congress is committed to providing more funding. The Senate on April 9, 2020, was negotiating a package in the $250 billion range. Senate Majority Leader Mitch McConnell (R-KY) wants the money to solely go to bolster the PPP program while House Speaker Nancy Pelosi (D-CA) and Senate Minority Leader Chuck Schumer (D-NY) want to include funding for other needs, such as state and local governments and healthcare providers. The bill remains at an impasse; however, it is highly likely that legislation passes with more funds for the PPP loans.
Conclusion
The key takeaway from recent events is that the government needs to dramatically improve the loan approval process and address the concerns that banks have regarding fraud and guarantees before the money will start to flow. If you haven’t yet done so, apply for the PPP loan, but figure out another short-term solution for keeping your business going before the money finally arrives.
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