On March 26th, the Congress passed the CARES Act - at $2.2 trillion dollars, the largest economic rescue package ever.
Here is a breakdown on how the CARES Act can help your company. We will update this post as more information becomes available.
What is it?
$349 billion is being loaned to small businesses to cover their payroll. Most (if not all) of this loan will be forgiven if you do not lay off employees.
In other words, this is free money from the government to cover your payroll.
Do I qualify?
You are eligible if you have under 500 employees or are a "small business concern" (as defined by the SBA).
Each industry has different criteria for what a small business concern is. For example, as a misc financial services firm (North American Industry Classification System Codes: 523999), Wefunder is eligible because we have under $41.5 million in revenues.
Having a venture capital investor who can control your startup might be disqualifying, unless the SBA changes the rules for what is considered an "affiliate" in their definition of a small business concern. You can read more than you ever want to know about affiliation rules on the SBA's web site.
What is the maximum loan?
Take your average monthly payroll expense over the last 12 months (excluding the amount in excess of $100k for employees that make more) and multiply it by 2.5. That is the maximum loan you are eligible for. However, it can't exceed $10 million.
How do I apply?
Loans are made through the SBA 7(a) program. Over 800 SBA-approved lenders are expected to be able to distribute loans.
You can call your bank or find SBA-approved lenders in your area through SBA’s online Lender Match tool.
What does the application look like?
On March 31st, the Treasury Department released the application form.
When can I apply?
Today, Treasury Secretary Steven Mnuchin said banks should be able to issue small business loans by April 3rd.
That's an aggressive timeline. We wouldn't be surprised if there are delays. The SBA distributed $28 billion in 2019, and they are being asked to deploy over $400 billion in April. Expect growing pains.
Do I need to personally guarantee the loan?
Do I need collateral to get the loan?
How can I use the money?
You can only use the money for payroll, health care, rent/mortgage/utilities, and interest on debt.
How much of the loan is forgiven?
The amount used for payroll (up to $100K for each employee), health insurance, mortgage interest, rent, and utility payments in any 8 week period from February 15th through June 30th is forgiven, as long as you don't lay anyone off.
The devil is in the details. If you lay off people, it gets a little more complex (forgiveness is ratio of payroll reduction). If you cut salaries of those who earn under $100K by more than 25%, less debt will also be forgiven.
If you have already laid off some employees, you can still be forgiven for the full amount of your payroll cost if you rehire your employees by June 30.
What is the interest rate and maturity date fo the amount that is not forgiven?
The legislation mandates that the interest rate cannot exceed 4% and the term not over 10 years. SBA lenders may offer terms within those limits.
When is the application deadline?
June 30th, 2020
The CARES Act also has other sections that help small businesses.
If you have an SBA loan, the CARES Act allocates $17 billion dollars to covering your payments (principal + interest + fees) over the next 6 months.
The CARES Act allocates another $10 billion (in addition to $7 billion authorized in another bill last week) to the SBA Emergency Disaster Loans.
Most states now qualify as a disaster area. Max loans are $2 million. 3.75% interest. Loan period up to 30 years. Personal guarantee required for amounts over $200,000. If you have any collateral, it must be pledged.
The CARES Act gives businesses a tax credit for the 6.2% Social Security payroll taxes paid for employees kept on payroll during the crisis. It's equal to 50% of what you spent, capped at $5,000 per employee. Some businesses may also defer their payroll tax due in December 2020 to December 2021.
You may qualify if you do not have an SBA loan, and had a 50% loss compared to the prior quarter.
Startups should get all the free money they can! As we learn more about the rollout of the loan applications, we'll assist every company we work with to apply.
However, we don't expect that the SBA loan will be enough money to weather this crisis. The legislation assumes this crisis will be over by June 30th. We think it's more realistic to expect periodic lockdowns over much of the remainder of the year.
Wefunder has two programs that may help.
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