The coronavirus has upended all of our lives in entirely unpredictable ways. Because of the nature of the disease’s spread, primarily through public interactions, and the possibility of the highly contagious virus sickening enough Americans to potentially overwhelm the nation’s healthcare systems, it seems like everything we have been hearing about over the past few weeks has been about “flattening the curve” – basically, reducing the number of infections to a manageable level so that doctors and nurses can get patients the care they need while the rest of us ride out this epidemic. And unfortunately, the only way to do that is to reduce interactions between people, the concept of “social distancing.”
Not only is social distancing inconvenient, strange, and psychologically isolating, but it has a very real toll for those of us who own small businesses. Many larger corporations have continued hiring and possess the resources and the flexibility to continue to offer their products and services in an online or virtual setting, but many small businesses rely on physical, in person interactions with their customers. This characteristic is why so many of us were drawn to starting a small business in the first place – we want to give back to members of our immediate community. But what do we do when community interaction is no longer safe?
Unfortunately, for many small businesses, the answer is clear. Without community interaction, you have no customers. Without customers, you have no revenue. Without revenue, you have to start thinking about making cutbacks. And as hard as it is, the first and most obvious place to make cutbacks is within your labor force. There is probably no harder decision for a small business owner to make than the decision to start furloughing or even entirely laying off employees. These are the people with whom you have built your business from the ground up, the lifeblood of your entrepreneurial endeavors, people who have likely become more than just associates and colleagues, but good friends and maybe even family.
And laying off your employees could be just the tip of the iceberg – scientific and public health experts are predicting that what the United States is going through right now could be just the beginning of the epidemic. It is likely that this situation is going to get a whole lot worse before it gets better, and we may be practicing social distancing for the next several months. Can your small business survive for months without any revenue at all? Most small business owners already know the answer to that question. We are not the large corporations, with their giant stockpiles of cash that they often spend on stock buybacks to drive up their own share prices. We are community businesses that often live hand to mouth. Months with no income could lead to closing our doors forever, losing our start up investments, and potentially, in a worst case scenario, declaring bankruptcy.
Fortunately, there is some hope. The United States federal government has recognized the unique plight that small businesses across America have been placed in, through no fault of their own. When the best move to promote public health is to close, but the best move to sustain your business and your lifeblood is to stay open, what choice do you make? The U.S. Congress has made that choice a little easier with the introduction of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act.
CARES Act
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The CARES Act is a result of intense negotiations between the U.S. House of Representatives, controlled by the Democrats and led by Speaker Nancy Pelosi of California, the U.S. Senate, controlled by the Republicans and led by Majority Leader Mitch McConnell of Kentucky, and the White House, controlled by Republican President Donald Trump, who delegated his Secretary of the Treasury, Steven Mnuchin, to lead these talks. The act in its current form has passed through the Senate as of Thursday morning (3/26). It will next be sent to the House of Representatives for a vote, and then passed on to President Trump for his signature.
It is important to remember that the U.S. government is in place to do one thing and one thing only – represent their constituents, aka YOU. You can play a vital role in passing the CARES Act and similar coronavirus relief legislation. Here is how:
- Contact your Representative at this link and tell them to vote yes on the CARES Act when it hits the House floor (a vote is expected later today, 3/26)
- Contact President Trump at this link and tell him to sign the bill as soon as possible after it passes the House, so that it rapidly becomes law
- Contact both of your Senators at this link and thank them for voting yes on the bill (every single Senator voted yes, which almost never happens!), and encourage them to consider further coronavirus relief legislation
- Note: it always, always, always helps to have a personal story ready when you are trying to convince a lawmaker to do something in the future. When you reach out to your Senator’s office, make sure you are ready to talk about the ways the coronavirus pandemic has specifically impacted your business and its subsequent impact on your community.
- Contact Speaker Pelosi at this link, Leader McConnell at this link, Senate Minority Leader Democrat Chuck Schumer of New York at this link, and Treasury Secretary Steven Mnuchin at this link, to thank them for reaching a compromise with their negotiations and getting the CARES Act off the ground. And of course, also remind them that this epidemic could drag on for months and that further legislative relief could be needed in the future.
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The CARES Act is going to provide significant relief for small businesses to hopefully get them the cash flow they need to ride out the rest of this pandemic, however long that may take. It accomplishes this through several provisions, but before we break those down, let’s start by clarifying what the act defines as a “small business,” to make sure that you and your business qualify. The CARES Act defines a “small business” as any business or nonprofit organization that employs fewer than 500 people, and that was in operation on March 1, 2020. If you fall under that umbrella, here is what is coming your way:
Forgivable Bridge Loans
Section 7(a) Loans
Starting now and continuing through the end of 2020, any small business under the qualifying definition above is eligible for a Section 7(a) Loan. This loan refers to Section 7(a) of the Small Business Act, which basically allows the federal government to loan money out to small businesses. Usually, these loans are fairly limited in scope, but the CARES Act has expanded them. These loans can now be either:
- The equivalent of four times your monthly expenses (which can include payroll, mortgage/rent payments, and any business debts). Yes, you read that right, that is four months of your expenses, totally covered.
- Ten million dollars. And no, that’s not a typo – if four months of expenses adds up to less than ten million dollars, you can request a loan of ten million dollars.
Per the act, small businesses can use these loans for:
- Payroll support, which includes paid/sick/medical leave and the costs of maintaining employee group health insurance plans
- Continuing to pay your employees their salaries
- Mortgage/rent/utilities/any costs associated with maintaining the premises of your business
- Any other outstanding debts
Typically, when a business requests a Section 7(a) loan, they have to pay a fee to get access to the money. Those fees have been waived under the CARES Act.
Section 7(a) loan guarantees have also been adjusted. A loan guarantee is the amount of the loan that the guarantor (in this case, the federal government) agrees to take on in case the borrower has to default. Remember, a Section 7(a) loan is a loan, not a grant, so you will have to pay the money back. But in case something comes up and you can’t pay the money back, the CARES Act allows for the following provisions:
- If the remaining balance on the loan is more than $150,000, the federal government guarantees they will absorb 75% of the remaining debt if you have to default
- If the remaining balance on the loan is equal to or less than $150,000, the federal government guarantees they will absorb 85% of the remaining debt if you have to default
Additionally, the CARES Act stipulates that Section 7(a) loans can have a deferred payment system for a year, so you will not even have to start worrying about paying the loan back for quite some time.
SBA Express Loans have also been adjusted by the CARES Act. An express loan is a loan specifically designated for businesses that have suffered a disaster (which was intended for events specific to a certain location, like Hurricane Katrina, but is now basically all businesses at this point). Prior to the CARES Act, the maximum amount of a SBA Express Loan could not exceed $350,000, but that amount has been bumped up to $1 million.
Loan Forgiveness Provisions
In addition to all of the provisions listed above, the CARES Act allows for the circumstances under which loans can be forgiven to be expanded. Essentially, you will not be required to pay back the portion of your loan which you spent on covering payroll expenses during the coronavirus pandemic.
Some stipulations:
- “Payroll expenses” cannot include compensating an individual employee in an amount higher than $33,333
- There is an exception for this rule if your employees receive tips from customers – those tips will not count towards that $33,333. The $33,333 amount is just the employee compensation that comes out of your business’ payroll, not the employee’s total compensation.
- If your payroll expenses includes paid sick leave or family leave that is covered under the Families First Coronavirus Act (the first piece of legislation Congress passed to provide coronavirus relief, link here), that leave cannot be included as part of your loan forgiveness
- The amount of forgiveness on your loan can’t exceed your total payroll costs, or the costs of paying down your debts
- This one is great news – the amount of forgiveness on your loan will NOT be considered taxable income, so you will not have to pay taxes on it in 2021. With this in mind, there is no reason any business who has been impacted by COVID-19 should not apply for payroll expense loan forgiveness. It is essentially free, and tax-free, money.
Grant Funding
The CARES Act has an additional section on grants for small businesses. This section stipulates that a business needs to have been “substantially affected” by COVID-19 in order to be eligible. But don’t worry, your business is more than likely eligible. If your business has experienced one of the following, you have been “substantially affected”:
- Disruptions in your supply chain, which includes both disruptions in the quantity and the quality of your available supply, as well as disruptions in the process of making supply related payments
- “Staffing challenges,” which could be interpreted to mean a lack of revenue to pay your workers, a large amount of your workers no longer being able to put in time because they are sick, they are caring for someone who is sick, or they need to take care of their children after schools have closed due to COVID-19, etc.
- Decrease in sales or a decrease in customers – this situation definitely applies to everyone at this point
- Your business closing entirely for a short period of time, whether because you do not have the cash to keep it afloat, or because you live in an area where state or local authorities have required all nonessential businesses to close and your business has been deemed nonessential
Some of these small business grants are meant to be used for education and training purposes. Applicable education/trainings include:
- How to apply for loans and other resources available through federal and state governments
- How to minimize the spread of the coronavirus
- The coronavirus’ impact on supply chains, and how to mitigate it
- How to shift to telework
- How to provide good customer service remotely as opposed to in person
- Cyber threats that may arise in a remote, fully online workspace
- How to mitigate the business impacts of reduced travel availability due to the coronavirus
- Other “relevant business practices to mitigate the economic effects of COVID-19”
These education and training grants are free money to improve your knowledge and the knowledge of your employees – no funding match is required by business owners in order to access this money. The CARES Act highlights that the top priority for these grants will go to businesses in rural areas and areas that are economically distressed. Also, the Act waives the matching funds requirement originally included in the Small Business Act for small businesses run by women.
Tax Deferrals
The government has already pushed Tax Day back from April 15, 2020, to July 15, 2020 (although if you think you may be eligible for a refund, the Internal Revenue Service encourages you to still file your taxes as soon as possible!). But, the CARES Act has pushed deadlines back even farther for some taxes typically paid by small businesses. Employer payroll taxes for 2019 are now not due until December 31, 2020!
Paid Leave Limitations
The Families First Coronavirus Response Act passed last week by Congress expanded paid leave, but the CARES Act scales it back (it should be noted that these paid leave requirements are the floor, not the ceiling – there is nothing stopping you as a business owner from providing your employees with more paid leave if you are able to do so).
- Employers are now not required to pay an employee on paid leave that is covered by the Emergency Family and Medical Leave Expansion Act more than $200 per day or $10,000 in total for the duration of their leave.
- If one of your employees is under quarantine due to COVID-19, or has symptoms of COVID-19 but is waiting for a diagnosis, you as their employer are not required to pay them more than $511 per day or $5,110 in total (so ten days of paid leave).
- If one of your employees is caring for someone who is in quarantine due to COVID-19, or has symptoms of COVID-19 but is waiting for a diagnosis, or is taking care of their children who would normally be in school if their school was not closed due to COVID-19, you are not required to pay them more than $200 per day or $2,000 in total.
- You also no longer need to provide paid leave to an employee when they have exhausted 80 hours of paid leave.
Laying off, furloughing, or cutting hours
Many small businesses will be forced to cut back their workforce immediately or in the near future. Consider those who will be affected by these critical decisions. How can we do this with compassion? With love? How can we get your people, the people who have helped the business to be successful, the resources they need in order to survive and, more importantly, thrive through this crisis? The Team at Wimbush Associates has created a new compassionate outplacement program with guaranteed job placements to help out. They will help your employees find new jobs that fit their life and career goals.
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