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A CFO Shares Everything You Need to Know About Applying for Loans Under the CARES Act

On March 27, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act to help small businesses across the country weather the economic crisis caused by the COVID-19 pandemic. The act introduces an unprecedented amount of funding, expanding access to the U.S. Small Business Administration’s (SBA) loans.

Now is the time to act. Affected companies – including many food and beverage distributors – can begin applying for loans with certain banks, and the money will likely be allocated quickly.

To understand the details of the act and the loans available to distributors, we talked to Betty Kayton, a CPA from Ernst & Young in California who earned an MBA from the University of Southern California. Betty worked in finance for big corporations like Citibank before moving into the startup world, where she has advised many manufacturing and distribution businesses.

“I’m probably the only CFO on the planet that has worked for three baby bottle companies,” she laughs. She has also served as full time CFO for MGA Entertainment (maker of the Bratz doll) and LeapFrog Toys, and fractional CFO and advisor to Dropbox, Dropcam, Wholesail and dozens of startups.

Read on to learn Betty’s summary of the programs available to distributors and producers, who qualifies for the benefits, how to apply, and more.

SBA Loan Programs

Paycheck Protection Provision (PPP)

Media reports have primarily focused on the Paycheck Protection Provision in the CARES Act, which is designed to help companies retain employees or, in the case that layoffs have occurred already, to hire them back.  These loans are intended for cash-strapped companies that would need to terminate or furlough employees unless the company gets outside capital.

How it works

Calculate your average monthly payroll during the calendar year 2019 (this is the “base period”).  You are then generally eligible for a loan equal to two-and-a-half months of this base period’s monthly average payroll – including bonuses, tips, medical/dental/vision costs, and employer-paid retirement benefits (like 4019(k) matching contributions). As part of the application, business owners need to sign a statement promising that the money will only go to salaries, rent/utilities, and interest on mortgages for your place of business.

The especially good news about the PPP loans is that if your average monthly payroll during April through June 2020 is at least as high as your base period monthly average payroll, then the SBA will forgive the loan (and you don’t even need to pay tax on this forgiveness). If you do need to lay off employees or reduce salaries, then you will be required to pay all or part of the loan back to the government, but at a low 1% interest rate.

“Everybody is pushing the PPP because you don’t have to give a personal guarantee,” Betty says. “If you don’t pay the loan back, the company might have to file bankruptcy, but at least you don’t lose your house or your car.”

How to apply

About $300 billion is available to businesses under the PPP. Only a very few banks are participating in the CARES Act. (See a list of the most active SBA 7(a) lenders here.) Before you start filling out an application on the SBA website, Betty advises you to call the bank you are already doing business with to find out if your bank is part of the program and, if so, what the application process entails. Then work with your bank to go through their application process. A sample borrower application form is in this link.

The form is short, but it can take time to calculate some figures, such as the payroll expense. (See pages 8-11 of this document from the Department of the Treasury for information on how to compute it.) Additionally, you can ask your payroll services provider for a PPP worksheet. Most payroll providers (such as ADP) have a standard report format that you can run quickly to see the maximum amount of a loan you could get.

“Start gathering information, get everything ready, so that when the banks are ready, you can apply,” Betty says. Banks likely won’t be taking on new customers for the loan programs, so contact ones you or your immediate family members already have a relationship with – even if it’s a personal banking relationship. Don’t apply on the SBA website. Instead, follow your bank’s instructions about how to apply.

Who is eligible

To qualify for the benefits, companies must:

  • Have no other SBA loans
  • Have never failed to repay an SBA/government loan within the last seven years
  • Have never filed for bankruptcy

Additionally, companies must have fewer than 500 employees. These must be W-2 employees, though part-time employees may count as partial employees. If a person owns all of part of more than one business (for example, 75% of a wholesale fish company and 30% of a  vegetable farm), they may need to consider the number of employees under both (depending on their ownership share of each business). Those rules haven’t been finalized yet, Betty says, so much remains to be clarified.

How the loan is forgiven

The PPP is designed so that business owners can keep their staff employed. “The goal is zero layoffs and zero salary reduction,” Betty says. That said, business owners are allowed to reduce salaries for some of their lower-paid employees. And if you have already terminated employees, under many circumstances, you can hire them back after receiving the loan with no penalty.

In theory, you should receive the money from the loans five days after approval. As the CARES Act is currently written, money must be spent between now and June 30, regardless of when you receive the money – so time to use it is limited. Read details on PPP eligibility and forgiveness here.

Payroll Tax Holiday Deferral

Typically, an employee pays social security and Medicare taxes from each paycheck, and an employer matches the contribution. Under the Payroll Tax Holiday Deferral program, starting on April 1 you can wait until 2021 or 2022 to remit those taxes to the government (a deferral of about $7,000 per employee). Please note that if you don’t pay these taxes in 2021/2022, then a personal guarantee comes into play and you may be personally liable for the tax.

Who qualifies: Employers who receive an SBA loan through the PPP cannot also use this tax deferral program.

How to get it: The process is almost automatic, with no application necessary. Work with your payroll provider, who should have a form to submit.

Employee Retention Credit

The Employee Retention Credit program offers a credit equal to 50% of qualified wages paid between March 12 and December 31, including medical, dental, and vision insurance. Companies may receive a maximum of $5,000 per employee. Eligible employers may receive a refund if the amount of the credit is more than the taxes owed.

Who qualifies: Companies must be temporarily closed for business due to the COVID-19 pandemic or show a significant (more than 50%) decline in revenue compared to the same quarter the previous year.

How to get it: File a quarterly tax return, and you can receive the credit right away. Employers may receive an advance payment from the IRS by submitting Form 7200. See more details here. This is a “refundable credit,” which means that even if you don’t owe any money, the IRS will send a check to you anyway

Economic Injury Disaster Loan (EIDL)

The EIDL program, sometimes called the “Hurricane Katrina loan,” provides loans up to $10,000 for businesses that are victims of an economic disaster.

Who qualifies: Eligibility for the EIDL is complicated, as businesses have to prove many different criteria. Read the rules carefully to learn if your experience fits the bill.

How to get it: Start here to verify eligibility.

More Tips for Loan Applications

Enlist expert partners. Unless you are obviously qualified for the programs (for example, you own 100% of a single company and you don’t have any ownership interest in any other company), it’s a good idea to call your attorney to learn if your company is eligible. If you have an interest in multiple businesses, an attorney can also help you determine how many total employees you should count under the PPP.

If you determine that your company is eligible to receive the loans, reach out to your accountant or the person responsible for your books and tax returns. Someone who knows the business well will be best suited to ask questions pertinent to your unique business (think seasonality and seasonal workers).  

Choose the right program. Business owners do need to act quickly, but that doesn’t mean you should just jump in and start applying, Betty says. Most of the CARES Act loan programs are restrictive, meaning that if you use one, you can’t use any others.

Do your research to be sure you’re choosing the right program(s), and find a bank that will accept your application. If no bank is going to work with you on the PPP, choose another program. Calculate how much you can receive under the PPP – if it’s less than you anticipated, consider another option (such as the payroll tax holiday deferral).

Heed the deadline. The deadline to apply for loans under the CARES Act is June 30, though many believe that the money will run out long before that date. Businesses that receive loans through the PPP also have only until June 30 to spend the money. Congress could extend both of these deadlines since it takes time to issue loans, Betty says, but there’s no guarantee.

Other Ways to Reduce Costs and Access Capital During Economic Crisis

Preserve cash. Cash is king right now. “Do what’s necessary to preserve cash.  Make it last,” Betty advises.

Defer income tax payments. The April 15 deadline for filing income tax returns and paying your estimated taxes were both deferred until July 15. Also, if you had a net operating loss in the past year(s), that could be more favorably treated under the CARES Act.

Renegotiate lease payment terms. Try renegotiating your lease with your landlord, explaining that your business is closed. In the Bay Area, Betty sees businesses asking for the “defer and extend approach,” in which they pay $0 for three months and tack three months onto the end of the lease agreement. Alternatively, you may offer to pay half or a quarter of the sum now and not extend the lease. CBRE, a large real estate broker, estimates that around 30% of tenants will not pay their landlords in April. “With COVID-19, the stigma associated with rent renegotiation is gone,” says Betty. “Don’t ignore the landlord and not pay, but have an open dialogue with them, and make them your partner.”

Access employee benefit plans early. In the current economic crisis, in many cases, you can tap into your IRA and 401(k) plans early without paying a penalty.

CARES Act programs are intended to help businesses bridge the downturn period caused by the coronavirus pandemic. Take advantage of the benefits offered, and remember – it’s all temporary. The decisions you make now will prepare you to reopen doors to customers as soon as health and safety regulations allow.