Now that the U.S. government has approved a $2 trillion stimulus package, aimed at helping the U.S. weather the economic challenges posed by the coronavirus, business owners everywhere need to start figuring out how to get their part. The Coronavirus Aid, Relief, and Economic Security Act (CARES) makes $350 billion in government-guaranteed paycheck protection loans available to small businesses. For businesses that manage to avoid layoffs, these loans can potentially be forgiven.
Speaking at a National Small Business Town Hall presented by Inc. and the U.S. Chamber of Commerce on March 27, Neil Bradley, the Chamber's executive vice president and chief policy officer, said that he expects this money to get to small businesses "very quickly." But he acknowledged that both the government and lenders need to figure out exactly how the money will be distributed.
While the government and financial institutions get their processes in place, business owners would be wise to do some preparation, too. Here's how you can get ready to file a paycheck protection loan application:
Understand what you need
While it's heartening to see the federal government move to help entrepreneurs, it's also a bit difficult to figure out which program might be right for you.
"Stop for a minute," says Marilyn Landis, CEO of Basic Business Concepts, which provides CFO services to startups. "Remember that this is debt, most of it. You will have to repay that with future cash flow."
Indeed, one of the admirable aims of the package--to help small companies keep people on paycheck--comes with a potential dark side. You may take out a loan from the paycheck protection program thinking you just need to get through a rough patch, and that you'll ultimately be able to keep your employees. But as bad as things are, you also need to consider an even worse scenario: That the rough patch is worse than expected, and you're forced to lay people off. Then you'll also have to pay back the loan, adding to your troubles.
So look at your overhead and other fixed expenses. Try to understand which of these will go up as sales go increase, and try to be realistic about how long it will take to regain lost business--not an easy task, considering all the unknowns about the pandemic. And, says Landis, don't forget that existing loans backed by the U.S. Small Business Administration are currently offering six-month deferrals of principal and interest. If you already have one, that may give you the liquidity you need.
Talk to your health insurance broker too, just in case you have to furlough employees.
"Many plans will allow you to put someone on a furlough or a leave of absence," says David Barron, an employment attorney with Cozen O'Connor and head of that firm's coronavirus task force. "If it's two weeks or so, you might be able to keep that person on their health insurance."
Determine if you qualify
The so-called paycheck protection loans are available to all businesses that would normally qualify for a 7(a) loan from the SBA. Generally, that means all businesses with fewer than 500 employees, but there are some exceptions. You can find the size standards for your industry on the SBA website.
Hotel and restaurant companies will be able to count their employees per location. So if you have 10 restaurants, each with 100 employees, you would still qualify.
In addition, a whole host of business owners typically ineligible for SBA loans may qualify for these new loans. Nonprofits with fewer than 500 employees can qualify, as can sole proprietors, people who are self-employed, and people who make their income as independent contractors and typically receive 1099s.
Calculate your average payroll cost
The law allows businesses to take out loans equal to 2.5 times their average monthly payroll from 2019, so you need to know what that payroll number is. It should include salary and wages, of course, but also health care benefits and paid sick leave. There are some restrictions on including salaries for people making more than $100,000.
Share what you've learned
Once you've got this figured out, share your tips with other small-business owners and your vendors. Your independent contractors, for example, may not realize that they can apply for paycheck protection loans on their own, since they haven't traditionally been eligible for SBA loans. As business owners rally to help each other, sharing knowledge is just one more way to pitch in.