Many small businesses are suffering because of COVID-19. The financial losses associated with the virus have resulted in business owners making the decision to close or lay off their employees. If you are a small business owner, you have likely spent countless hours thinking about your business’ future and whether you could continue supporting your workforce. In your frustration, you might have even considered applying for a loan – which could cause even more issues in the long run.
Although many business owners may feel overwhelmed with the current situation, there may be a solution thanks to the federal government. The federal government approved a $2 trillion stimulus package in response to the pandemic. Many small business owners will be able to benefit from the stimulus package. It is important to note that this is the same stimulus package that is providing all eligible individuals with $1,200 stimulus checks.
The stimulus package consists of the following elements.
Economic Injury Disaster Loans (EIDLs)
These loans are typically available to those affected by natural disasters. However, under the CARES Act, these loans are available to all business owners. Those who apply for EIDLs can receive a check of up to $10,000 (given that they made too much money to be eligible to receive the stimulus check). In the past, EIDLs have been associated with the following terms:
- Loans of up to $2 million
- Loan terms of 30 years
- Interest rates of 3.75% for small business and 2.75% for nonprofits
- First month’s payments deferred a full year
The CARES Act has resulted in some changes to EIDLs to essentially expand the number of small business owners who could benefit from EIDLs. These changes include the following:
- EIDLs approved solely on applicant’s credit scores
- Prior bankruptcy does not disqualify applicants
- EIDLs smaller than $200,000 can be approved without real estate as collateral or a personal guarantee (loans will take general security interest in business property)
- Sole proprietors, independent contractors, and nonprofit organizations can apply
Paycheck Protection Program (PPP)
The PPP is a program designed to help small business owners in covering the costs of payroll. Through the PPP, small business owners can get a loan to help them continue paying their employees. These loans can be potentially forgiven. Without a doubt, a PPP loan could save your small business.
To qualify, businesses must meet the following requirements:
- Have fewer than 500 employees
- Show that the business was operational on or before February 15, 2020
- Prove that the business was affected by the pandemic
- Prove that the loan is necessary due to economic uncertainty
As previously mentioned, this loan can be forgiven. If business owners use the money from their PPP loans for payroll, rent, mortgage, utilities, obligations, or other fixed-debt obligations within the first eight weeks after receiving the funds, the loan can be forgiven entirely.
However, it is possible that only a part of the loan will be forgiven. Whatever portion of the loan is not forgiven automatically converts to a two-year loan with a 0.5% interest rate.
SBA Loan Forbearance
Many business owners already had taken out loans prior to the start of the pandemic. The business owners that already had open loans, including SBA 7(a) loans, 504 loans, or Micro loans are also eligible to get relief thanks to the stimulus package. Specifically, the CARES Act ensures that the government will automatically make payments on your accounts over the next six months (starting April). During the six-month period, all payments (including interest) will be covered. At the end of the six-month period, business owners will return to their payment cycles.
Increased Access to Retirement Funds
Instead of dealing with loans, some small business owners may prefer to tap into their retirement funds. The stimulus package facilitates access to these retirement funds. The stimulus package increases the total amount that individuals can borrow from themselves via their 401k plans. Before these changes, individuals could only access up to $50,000 or 50% of their account value (whichever was less). Now, individuals could access up to $100,000. There are no taxes or penalties that apply to the loan. Individuals are required to pay their loans back in five years in level payments (lump-sum payments at the end of the loan period are not acceptable).
The stimulus package also creates an early distribution rule. Under the penalty-free early distribution rule, individuals who are under the age of 59-and-a-half have the option to take an account distribution of up to $100,000 from their retirement accounts. The retirement accounts eligible for this benefit include 403(b) plans, 457 plans, pension plans, 401(k)s, SIMPLE IRAs, SEP IRAs, Roth IRAs, and IRAs. Those who choose this option will find that the early withdrawal penalty will be waved; however, they will be taxed and required to pay the loan over a three-year period.
Know Your Options
Regardless of the final decision that you make, you can benefit from the stimulus package in one way or another. If you would like to learn more about the different options available to you in terms of your small business, do not hesitate to seek legal assistance with our experts immediately.