Businesses and individuals in the U.S. and worldwide are now affected by forced closures and economic slowdowns due to COVID-19. If you are a sole proprietor, contractor, or business owner you might need to obtain new capital in the form of loans. Moreover, you might need to defer payment on existing personal loans or mortgages. Below is information on new and enhanced programs designed to help you and your business thrive after the coronavirus.
Getting Assistance on Existing Loans:
Deferring payments is all about communicating with your lender or mortgage servicer. Contact them as soon as possible to find out what kind of help they can offer you.
Look to see if your mortgage is owned by Fannie Mae (www.knowyouroptions.com/loanlookup) or Freddie Mac (ww3.freddiemac.com/loanlookup). If they are owned by one or the other, they are offering forbearance for up to 12 months, waiving assessments of penalties and late fees, halting foreclosure for a period of time, suspending credit bureau reporting of delinquencies related to forbearance, and loan modifications to lower payments or keeping payments the same after the forbearance period. Other lenders offer similar help. The important step is contacting the lender to work out a plan.
Visit the links below for more information:
Obtaining a New Loan:
If you are looking to obtain a new business loan to fund obligations during the COVID-19 shutdown, The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and The Families First Coronavirus Response Act provide help in the form of tax credits, enhancements to existing loan programs, and new loan programs.
Some of these programs stand alone, but some are related in that if you participate in one program you cannot participate fully in another. Because of this, take time to review these programs with your financial advisor in conjunction with your tax professional and determine which program will provide you with the most benefit.
Below are some of the basics on small business loans designed to help with COVID-19 business interruption.
The Payroll Protection Program (PPP), created by the CARES Act:
June 10, 2020, Update: The Senate approved the Paycheck Protection Flexibility Act last week and President Trump signed the bill on Friday. Overall, it appears to offer just what the title says, more flexibility for business owners/borrowers to obtain forgiveness on the PPP loans. The highlights are below:
- Borrowers can choose between 8 or 24 weeks as the time period to restore FTEs and wages to pre-pandemic levels.
- New exception to obtaining pre-pandemic FTE and wage levels due to being unable to restore business operations.
- Codifies previous exceptions for inability to rehire employees and/or hire new employee for unfilled positions.
- Payroll Expenditures are now only required to be 60% of the loan proceeds. This is down from the original 75%.
- Allows PPP borrowers to delay payroll tax payments.
- Borrowers can take 5 years to pay off unforgiven loan portions. Interest rate is still 1% (older loans will need to be negotiated with the lender)
April 24, 2020, Update: President Trump signed legislation funding an additional $310 billion for the Paycheck Protection Program. According to the SBA’s website, they will resume taking applications from participating lenders on Monday April 27, 2020. Due to the popularity of this program, funds are expected to be depleted quickly. Continue communicating with your banker and participating institutions to obtain financing and reach out to your Parsec advisor for guidance.
- Provides loans to businesses with fewer than 500 employees, during the covered period from Feb. 15, 2020 to June 30, 2020. This includes sole proprietors and non-profits. The idea of the PPP is to help retain employees and keep businesses whole during the downturn. This way your business is ready to go when the economy opens back up. The Small Business Administration will be issuing guidance and regulations for these loans shortly.
- Maximum loan amounts for a business are 2.5 times average monthly payroll for the year ending on the date of the loan. A $10 million cap is applied.
- PPP loan terms are two years at 1% interest. Additionally, the first loan payments will be deferred for 6 months.
- Loan proceeds can be used to cover payroll, mortgage payments, rent, utilities and other debt service requirements.
- A portion of these PPP loans may be forgiven on a tax-free basis. To obtain forgiveness, the borrower will apply to the lender and document payments made by the borrower during the eight-week period beginning on the date of the loan. Payments eligible for forgiveness include payroll cost, mortgage interest, rent and certain utility payments (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). The amount forgiven will also be subject to reduction if the borrower reduces the number of employees, employee salaries or both during the eight-week period following the date of the loan.
- These loans are obtained through existing 7(a) SBA lenders. Here is a link to the most active 7(a) SBA Lenders. The CARES Act intends to sign up most U.S. banks to participate in the PPP so call your bank to see if they are participating in this program.
- Borrowers can download an application here: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Application-3-30-2020-v3.pdf
- Small businesses and sole proprietorships can apply starting April 3, 2020. Independent contractors and self-employed individuals can apply beginning April 10, 2020. Since demand is expected to be high for this program, we encourage you to apply early.
SBA Debt Relief:
- Borrowers with existing or new 7(a) SBA loans can have six months of principal and interest paid by the SBA.
- Contact your lender for information on how to obtain these payments.
Economic Injury Disaster Loans (EIDL):
- Provides small businesses (including sole proprietors) with working capital of up to $2 million. Additionally, The CARES Act adds the ability for a business owner to obtain an advance of $10,000 on the EIDL for emergency capital.
- Apply: https://www.sba.gov/disaster-assistance/coronavirus-covid-19
NC COVID-19 Rapid Recovery Lending Program:
- Loans up to approximately two months of 2019 average monthly revenue.
- Terms are for six months of no interest and no payments, followed by 48 months of payments at 5.5% interest.
- Eligibility limited to North Carolina small businesses and sole proprietors.
- Personal guarantees and assignments may be required.
- Apply: https://ncrapidrecovery.org/ (As of 3/29/20 initial funding is exhausted, but they are accepting applications as they look for additional funding.)
One Buncombe Fund Small Business Loans:
- Provides basic needs for unemployed individuals and bridge funding for small businesses.
- Eligibility is principally available for businesses having a physical location in Buncombe County, N.C. Must have between 1 and 49 employees (including self-employed owners) and have been in business for at least 12 months.
- Apply: https://www.mountainbizworks.org/one-buncombe-fund/
This is a fluid situation with new guidance and regulations to be issued by United States Agencies. Please contact your Parsec advisor and business tax advisor for further guidance and information.