As the novel coronavirus continues to spread, the federal government has passed several measures to help American workers and businesses. Two of those measures include the Families First Coronavirus Response Act and the CARES Act. Both have major implications for businesses of all sizes, but small businesses with less than 500 employees will want to carefully weigh their options under these two acts to determine their business strategies for the next few months. Uncertainty abounds during this time, but here’s what we know about these congressional acts and their programs designed to help small businesses and employees.
What is the Families First Coronavirus Response Act?
The Families First Coronavirus Response Act (H.R. 6201) was passed to protect American workers and mitigate the health concerns stemming from the novel coronavirus. The act provides funding for free coronavirus testing, credits for employers to fund qualified sick and family leave, and increased funding for food stamps.
Watch our webinar with Sparks Law to learn more details about the Families First Coronavirus Response Act and how it affects employers and employees.
Commonly Asked Questions about the FFCRA and CARES Act
What is the CARES Act?
The Coronavirus Aid, Relief and Economic Security Act or CARES Act became law on March 27th. Since then, a lot of business owners have had questions about how it will help them. The stimulus package provides temporary economic relief, including the expansion of unemployment eligibility and perhaps, most importantly to business owners hoping to not shutter their business and furlough or lay off workers, a Paycheck Protection Program (PPP).
The program allows for $349 billion in loan guarantees to small businesses to sustain operations and keep workers employed.
The CARES Act works in tandem with the Families First Coronavirus Response Act to bolster businesses and provide support for payroll and sick leave during this time of uncertainty.
What are some of the highlights of the Paycheck Protection Program?
- Affects businesses with 500 employees or less, or less than $12 million in revenue
- Application processing started April 3rd and ends June 30
- Maximum loan amounts equal 250% of average monthly payroll cost, up to $10 million
- Individual annual salaries are capped at $100,000
- All loans have a 1% fixed interest rate
- Require no collateral or guarantor
- Repayment is due in two years with no prepayment penalties or fees
- Loan payments will also be deferred for six months
- The loan will be forgiven if a small business uses the PPP for the specified expenses over an eight-week period
- The loan may be used for rent, utility payments, and mortgage interest
- If you want to have the loan forgiven, 75% of the money received MUST be used for payroll costs
Is my business eligible for a small business loan through the CARES Act?
During American Land Title Association’s (ALTA) presentation on How Your Business Can Access Financial Assistance due to the COVID-19 Pandemic, 55% of attendees responded that they think the COVID-19 pandemic will affect their ability to maintain payroll.
In order to qualify for the PPP, the following is required:
- Must be a small business or non-profit
- Must have 500 or fewer employees or less than $12 million in revenue
- Must be operating and physically located in the United States
- Must be in business before February 15th, 2020
- MUST be facing some sort of UNCERTAINTY caused by the novel coronavirus – most businesses should be able to make that certification
- Independent contractors and self-employed individuals can also apply, but guidance and clarity on whether their loans can be forgiven is lacking
According to surveys from ALTA, 97% of title companies employ less than 500 people in their operations. In general, real estate agents are classified as statutory independent contractors for federal tax purposes. With this in mind, almost all title companies and real estate agents are eligible, but the following questions are most useful for small business owners.
How much money can my business get?
Businesses that meet the qualifications can borrow up to 250% of your business’s average monthly payroll costs for the 1-year period before the loan origination date.
However, there are some hard limits on the amount of the total loan. Some monetary caps include:
- The total loan amount can’t exceed $10 million
- Individual compensation is capped at $100,000 per employee
- Only employees who reside in the United States qualify for payroll costs
Example of formula to determine loan amount:
- Annual payroll: $1,200,000
- Average monthly payroll: $100,000
- Multiply by 2.5: $250,000
What are the all-in costs for the monthly compensations of each employee? Add your own compensation into the equation.
What isn’t covered in the CARES Act?
Not all businesses that meet the qualifications above will be eligible for the Paycheck Protection Program. Businesses will be disqualified if the following is true:
- Engage in any activity that is illegal under federal, state or local laws (This includes marijuana dispensaries)
- An owner with 20% or more of the applicant’s equity is incarcerated, on probation, or parole; is presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of a felony within the last 5 years
- You or any of the owners of the business have obtained a SBA loan that is currently delinquent or has defaulted in the last 7 years and caused a loss to the government.
Additionally, certain types of employees aren’t covered by the program:
- Household employees like a nanny, babysitter, housekeeper, or gardener (this is not considered a business as there is no profit motive even though you have an employee)
- Independent contractors like title searchers, abstracters, or closers (they can apply for a loan through the program themselves, so help provide the necessary documentation, but don’t use their compensation in your payroll calculation)
- Non-US based employees
- Highly compensated individuals are capped at $100,000
Getting started on applying for the SBA loan under the CARES Act
The following questions will help guide small businesses during the application process.
How do I find a lender?
Most federally insured banks, credit unions, farm credit institutions are currently a part of the SBA 7 (a) program, so start with a lender you already know. A bank that already knows your business and done their due diligence on it will most likely be able to process the loan faster.
Before the CARES Act was passed, about 1,400 financial institutions were a part of this program and processed about 60,000 loan applications a year.
Since the CARES Act, over 500 more institutions have applied. In the first three days of the extended program, one institution alone, Bank of America, accepted 177,000 applications for 32.5 billion worth of aid.
This unprecedented volume means that many lenders will be working out the kinks of the program as they go, so small businesses are advised to be patient and persistent during the application process. It’s also a good idea to apply even if you aren’t totally sure you’ll need it right away.
If it turns out that your regular bank isn’t a part of the program, you can search https://www.sba.gov/paycheckprotection/find to find one near you. Gather the paperwork needed to verify you and your business partners’ identities as well as any corporate/LLC documents required for the bank’s Customer Identification Program ahead of time to expedite the approval process.
What documents do I need to provide?
In addition to filling out the Paycheck Protection Program Borrower Application Form, you’ll need to gather some key documents. Those include:
- Payroll processor records
- Payroll tax filings
- Document number of employees
- Any form 1099-MISC supporting contractor pay
- Income and expense from a sole proprietorship
The information you can give up front, the faster your bank will be able to process and approve your loan. Anything you can think of that will help document that you’re a business that meets the qualifications should be gathered during your application process.
What process are lenders using to accept and underwrite these loans?
The basic borrower form only requires the applicant to make certifications regarding their eligibility. Banks that are a part of the program are able to underwrite, issue, and sell the loan based solely on what is contained in the form. While banks aren’t required to do any further due diligence, some institutions may have a more in-depth process.
Gathering your documents beforehand will help you answer the questions and certifications found on the form truthfully. Falsifying information on a federal document carries hefty fines and possibly imprisonment.
How can I spend the proceeds of a PPP loan?
There are some restrictions on how you can spend the funds from these loans. The funds are primarily for maintaining your current and most urgent business expenses. Here is a breakdown of potential uses:
- Payroll costs include both monetary and non-monetary compensations. When calculating the amount you’ll need, be sure to add to your formula any of these that apply.
- Salary, wages, commissions, and tips (capped at $100,000)
- Costs of benefits including
- Parental leave
- Family leave
- Medical leave
- Sick leave
- Allowance for separation or dismissal of employees
- Payment for group health insurance coverage
- Payments for retirement benefits (401k matching, pensions)
- Payment of state and local taxes assessed on compensation
- Mortgage interest payments (but not mortgage prepayments or principal payments)
- Rent payments
- Utility payments
- Interest payments on any other debt obligations that were incurred before February 15th, 2020 and/or
- Refinancing an SBA EIDL loan made between January 31st, 2020 and April 3rd, 2020.
Can the PPP Loan be forgiven in whole or in part?
Yes. For small businesses, the loan will qualify for forgiveness if you spend 75% on payroll expenses. The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. Borrowers must provide documentation on how the proceeds were used and submit a request to the lender servicing the loan in order to qualify for forgiveness.
If you use PPP funds for unauthorized purposes, you will be directed to repay the amounts under the SBA loan terms.
Even if you end up having to repay the loan, this is one of the cheapest and most accessible SBA loans offered with a one percent interest rate. There are no upfront loan fees, no personal guarantees or collateral required, and no prepayment penalties. So if you are facing some level of concern regarding your number of real estate deals, this loan will be a valuable asset.
Some lenders may require a Certificate of Good Standing as part of their approval process for loans under the CARES Act. You can order one through PropLogix here.