The CARES Act is a $2 trillion stimulus package that aims to provide economic relief to businesses and individuals impacted by the coronavirus pandemic. What measures could help your small business?
Update: President Donald Trump signed the CARES Act Friday afternoon following its passage in the House of Representatives. The $2 trillion economic relief bill is designed to mitigate the economic impact of the coronavirus pandemic.
The CARES Act is a sweeping and unprecedented measure to stabilize the economy at a time when the coronavirus pandemic has grinded business to a near halt. The stimulus package includes a loan program intended to help businesses retain their workforce by offering loans with favorable terms and opportunities for loan forgiveness, as well as an expansion of unemployment benefits and emergency relief funding for small businesses. What would the stimulus package mean for your business, and how could you take advantage of the relief it would offer? Read on to find out.
What is in the coronavirus stimulus package?
The CARES Act is a massive $2 trillion stimulus package that includes a wide range of measures to assist businesses, individuals and healthcare organizations as COVID-19 continues to spread across the U.S.
Here's a closer look at some of the measures designed to bolster small businesses during the prolonged economic impact of the coronavirus.
- $500 billion in distressed industry loans: Certain industries, such as airlines and hospitality, were hit particularly hard by the coronavirus pandemic. The stimulus package includes $500 billion in loans to these distressed industries, in which many businesses have seen their revenue reduced to zero.
- $350 billion in forgivable SBA loans: This measure is similar in structure to the SBA 7(a) loan, but with more forgiving terms. Application fees are waived for these loans, which offer 250% of a small business's estimated monthly payroll costs prior to COVID-19. Funds received through these loans are eligible for the payment of salaries and wages, rents and mortgages, and utility bills. These loans can be forgiven, in some cases in full, if employers retain their pre-coronavirus workforce or rehire workers to pre-coronavirus levels.
- $17 billion in relief for SBA 7(a) and 504 loans: The stimulus package also includes $17 billion in relief for existing SBA loan programs. This measure stipulates that small businesses would not have to make payments on those loans for up to six months.
- $10 billion in emergency grants: These grants offer fast funding for businesses in critical need of immediate help. This measure offers up to $10,000 from the SBA, and the checks are intended to be delivered in as little as three days.
- Tax credits for employee retention: Businesses that retain their employees would be eligible for a tax credit worth up to 50% of the wages paid to their employees during the crisis.
- Unemployment insurance benefit expansion: The expansion of unemployment insurance benefits offers an additional $600 per week for up to four months. Under the plan, self-employed workers and independent contractors are also eligible to collect unemployment benefits for up to 39 weeks.
- Individual payments from the IRS: Under the stimulus package, individual Americans would be eligible for direct payments up to $1,200 per person dependent on income. Americans making up to $75,000 per year would receive the full $1,200, while those making $75,000 to $99,000 would receive a reduced amount. Americans who make more than $99,000 per year would not receive a check.
How can small businesses take advantage of the coronavirus stimulus package?
Taken together, these measures are intended to bolster the U.S. economy as the coronavirus keeps businesses limited or altogether closed. If your small business needs funding to stay afloat during this challenging time, the stimulus package could offer help. So, how can you take advantage of it?
How to apply for forgivable SBA loans
Chris Hurn, founder and CEO of small business lender Fountainhead, said the forgivable SBA loans could offer significant liquidity to cash-strapped businesses in the short term.
"These [loans] are really meant to stabilize companies," Hurn said. "What it's going to allow you to do is take your monthly payroll … and apply for a loan of up to 250% or 2.5 times that amount, up to a maximum of $10 million.
"These loans are eligible for forgiveness if you retain your prior level of workforce," he added. "Some of these loans may be forgiven in totality. For others, this might just be a working capital bridge to get them to the other side."
The loans will be administered through the U.S. Small Business Administration's (SBA) 7(a) loan program. The application process is the same as it is for a typical 7(a) loan, but application fees are waived under the stimulus package. The typical cap of $5 million on an SBA 7(a) loan has doubled to a total of $10 million. Additionally, Hurn said, certain requirements have been relaxed.
"There is no determination of repayment ability," he said. "You just have to determine whether the business was in operation on Feb. 15 earlier this year and had employees or independent contractors it paid salaries or wages to.
"There are also no personal guarantees on these loans and no collateral requirements from the lender. The maximum interest rate is set at 4%, and there are no prepayment penalties set on these."
How to prepare for loan subsidies for existing SBA loan programs
In addition to those loans, the stimulus package earmarks $17 billion for loan subsidies to existing SBA 7(a) and 504 loans. According to Lenin Agudo, executive director of the Pennsylvania-based Widener University Small Business Development Center (SBDC), this essentially makes them interest-free loans.
"Loan subsidies basically offer interest-free borrowing," Agudo said. "The subsidized loans are going to be made available, but we need to figure out how. Is this going through banks? Is this going through CDFIs [community development financial institutions]? We don't know this yet."
Agudo recommends preparing all financial documents now, regardless of how the exact process plays out. He said every small business should have these documents ready at the very least:
- Two or three years of tax returns
- Profit and loss statements
- Monthly breakdowns of sales before and after COVID-19
"Next, guidelines will be drafted for each of these programs, and we'll know more about what requisites we have to comply with to access this type of funding," Agudo said.
"Once the stimulus package is approved by Congress and we figure out how [aid] is going to be disbursed, look at those SBA partners in your community," he added. "They will be in a position to respond."
According to Hurn, there are about 1,700 SBA lending partners nationwide. Those are the institutions most likely to handle the disbursement of stimulus funds, he said, so opening a dialogue and forming relationships now could be helpful once the stimulus package is passed and implemented.
"If someone is in really desperate shape, they need to work with the experts," Hurn said. "I imagine most [SBA lenders] will participate in stimulus."
If you're looking to open a line of communication with a lender, use the SBA's lender match tool to look up SBA-approved lenders in your area.
How should small businesses spend coronavirus stimulus money?
If you get funding from the COVID-19 stimulus package, how could you or should you spend it? Business.com's community experts offered their advice.
"The best use of funds for SMBs that receive stimulus-related funding will be to use the funding for payroll and rehiring employees previously laid off due to the COVID-19 pandemic. The second priority for any small business should be to use funds for rent payments, mortgage interest and utility payments. If SMBs use the stimulus package for the above and retain the same average number of employees, the principal amount of the stimulus could be entirely forgiven, meaning small businesses will only be required to pay back the interest payments on the stimulus loan issued." – Adem Selita, CEO of The Debt Relief Company and business.com community member
"Stimulus funding is meant to cover normal operating expenses such as payroll, accounts payable, rent, utilities, mortgage payments, health benefits, medical leave, etc. It's important to make sure to apply for the correct amount of funding with the appropriate uses. SMBs are not able to use stimulus funding for business acquisitions or real estate purchases." – Matthew Gillman, CEO of SMB Compass and business.com community member
Once the CARES Act is signed by the president, it will be up to agencies like the SBA to disburse funds. In some cases, the process of how SMBs can apply for and obtain relief remains unclear, so it would be up to those agencies to clarify, Agudo said. Starting a conversation with local SBA lenders and financial professionals now is key to being prepared when stimulus funding becomes available.