Overview of the CARES Act

If you’ve been too busy worrying about the global pandemic and staying sane during lockdown to pay much attention to the news, you might not have heard about the CARES Act. Here’s a quick rundown of the Act and what it might mean for you. 

On March 27, the US government signed the Coronavirus Aid, Relief and Economic Security (CARES) Act into law. This $2 trillion relief package was created to help individuals, businesses and government organizations make it through the pandemic. There are many components of the CARES Act, but if you are a small business owner, the part that is most relevant to you is the payment protection program. 

How Will the Paycheck Protection Program Help Small Businesses?

The main purpose of the SBA payment protection program is to provide an incentive for business owners to maintain payroll during the pandemic. Traditionally in times of financial hardship, the first thing businesses will do to save money is cut down on payroll. The government brought in the PPP loan as a way to prevent mass unemployment across the country. 

As a further incentive, the PPP loan can be 100% forgivable if the bulk of the money is spent on payroll. For those that need to use the money elsewhere, repayment can be deferred 6 to 12 months, giving businesses the chance to get back on their feet before they have to start repaying the loan. 

What is the SBA?

The SBA is the Small Business Administration. Their mission is “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters”. 

To put it more simply, the SBA helps small businesses by providing them with funds to grow, and assist in times of crisis. 

The SBA is providing a number of assistance options during this pandemic, most notably they are in charge of distributing the Paycheck Protection Program Loans. On the 16th of April 2020, the US government announced they had exhausted the first round of funding for the SBA Paycheck Protection Program. However, only five days later, it was announced the program would receive an additional $310 Billion in funding. You can sign up for North One’s SBA PPP loan waitlist to secure your place in line for the second round of funding.

Paycheck Protection Program vs Economic Injury Disaster Small Business Loan Program

If you are unable to secure a relief loan for your business through the Paycheck Protection Program, the SBA also provides funds through the Economic Injury Disaster Small Business Loan Program. 

The Economic Injury Disaster Small Business Loan Program was initially designed to cover any financial losses caused by disasters such as floods, hurricanes and fires. Since the outbreak of COVID-19, the program has been extended to cover economic injury caused by the pandemic. To learn more about applying for the SBA Economic Injury Disaster Small Business Loan, visit the SBA website. 

If your business has suffered as a result of COVID-19 we recommend you apply for both the SBA’s PPP and EIDSBL. However if you do receive loans from both programs ensure you use the PPP for payroll, and the EIDL for other business expenses. 

What Small Businesses are Eligible for PPP?

If you are considering applying for a PPP loan, you’ll want to be prepared, after all, the first round took less than two weeks to run out. 

We recommend signing up for North One’s SBA PPP loan waitlist to ensure you are in a good position for the second round of funding. 

If your business meets the following criteria you can apply for the SBA PPP loan waitlist. 

  • Businesses with 500 or less employees
  • Sole proprietorship, independent contractor, anyone who would file as self-employed, such as a freelancer
  • 501(c)(3) Veterans organization that meets SBA loan criteria. 
  • If the business is still operating and paying employees beyond Feb 15-Jun 30
  • If the business is seasonal, pays employees seasonally, and operated between March 1 and June 30
  • If the business was not operating or paying employees after Feb 15 (i.e the business closed due to mandatory direction given by the government or went out of business due to the pandemic) 

The SBA understands that this is an incredibly difficult time for small businesses and as a result the PPP requirements are in some ways more flexible than a regular loan. Lenders of the PPP loan will not:

  • Take into account whether the applicant was refused credit (credit history)
  • Require a personal guarantee 
  • Require collateral

What Information is Used to Calculate a Given PPP Loan Amount?

The amount of money your business will receive as part of the PPP loan will be decided by your company’s average monthly payroll expenses over the prior 12-month period, multiplied by 2.5. The final amount will be 2.5 times your average monthly payroll.

When it comes to applying for a PPP loan you’ll want to ensure you’ve gathered your payroll information from the last 12 months before you start the application process. This can include the following expenses:

  • Compensation – salary, commission, pay wages, cash tips
  • Leave – vacation, paid time off, sick time
  • Severance packages
  • Benefits – health care, insurance premiums
  • Retirement benefits
  • State and local taxes imposed on employee compensation

The following expenses cannot be included in your PPP loan application. 

  • Compensation above $100k per employee 
  • Compensation for employees whose residence is outside of the U.S
  • Payroll taxes, retirement taxes, income taxes withheld on employee wages
  • Leave that is already provided through the Family First Coronavirus Response Act
  • Additional SBA loans that have been claimed

What Can Paycheck Protection Program Loans Be Used For? 

The key purpose of this PPP loan is to help small businesses pay payroll expenses such as employee salaries and commissions. However, the CARES Act has also authorized the use of these relief funds on other common business expenses such as rent, mortgage, utilities and interest or debt, including debt incurred before the crisis period (Feb 15-June 30). 

How Can You Get Your Paycheck Protection Program Loan Forgiven?

In certain circumstances the PPP loan can be 100% forgiven, meaning you won’t have to pay any of the money back. 

Here are the circumstances under which the loan will be forgivable: 

  • Employers retain employees at salaries comparable to what they made prior to the pandemic
  • Loans are used for their intended purpose 
  • Loans are used for no more than 8 weeks of payroll expenses 

If your business does not follow the above guidelines, you will have a maximum repayment period of 10 years to pay back your loan at an interest rate of 4%. 

If your business has been impacted by COVID-19 check this Coronavirus Crisis: Small Business Owner’s toolkit to take advantage of a long list of free and discounted products and services.