To help businesses affected by COVID-19, the Small Business Administration (SBA) is making two types of loans available to eligible small businesses. The first type of loan was authorized by the Coronavirus Aid, Relief and Economic Security (CARES) Act that was recently signed into law and is known as the Paycheck Protection Program (PPP). The second type of loan is a special “Disaster Loan” that has been authorized by the federal government for small businesses in states declared disaster areas. This article will discuss important information small businesses need to know in order to determine which type of loan will best suit their needs.
It is important to understand what kinds of businesses in the jewelry industry qualify as a small business by SBA standards. The regulations in this area are complicated. Generally, the following categories of businesses will qualify for both types of loans described above:
- Jewelry and Silverware Manufacturing: 500 employees or fewer
- Jewelry, Watch, Precious Stone & Precious Metal Merchant Wholesalers: 100 employees or fewer
- Jewelry Retail Stores: $16.5 million in annual revenue or under
- Public Relations Firms: $16.5 million in annual revenue or under
- Graphic Design Firms: $8 million in annual revenue or under
- Other Specialized Design Services: $8 million in annual revenue or under
- Convention & Trade Show Organizers: $12 million in annual revenue or under
- Other Technical & Trade Schools: $16.5 million in annual revenue or under
- Business Associations: $8 million in annual revenue or under
Eligible businesses may apply for both loan programs, but keep in mind that if a business receives funds from both programs, these funds may not be used for the same purposes.
Loan Option 1: Paycheck Protection Program Loan
The “Paycheck Protection Program” was created to help employers cover payroll expenses in the wake of the national emergency. There is up to $349 billion available for forgivable loans to small businesses. These loans are issued through existing authorized SBA lenders (such as banks or credit unions). Loan amounts will be forgiven as long as:
- The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8-week period after the loan is made; and
- Employee and compensation levels are maintained.
Payroll costs are capped at $100,000 on an annualized basis for each employee. Payroll costs include: salary, wages, commissions, tips; employee benefits (including costs for vacation, parental/family/medical/sick leave, allowance for separation or dismissal, payments required for health care benefits including insurance premiums, and payment of any retirement benefit; state and local taxes assessed on compensation; and for a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.
The loans can be for the amount of up to two months of the business’ average monthly payroll costs from the last year, plus an additional 25% of that amount. Loan payments will be deferred for 6 months. The interest rate is fixed at 1%, and the loan is due in 2 years. There are no penalties for early repayment.
These loans have the potential to be forgiven. If businesses want all or part of the loan forgiven, 75% of the forgivable amount must have been spent on payroll costs. Businesses will owe money when the loan is due if they used the loan amount for anything other than the costs outlined above over the 8 weeks after getting the loan. Businesses will also owe money if they do not maintain their staff and payroll:
- Number of staff: loan forgiveness will be reduced if you decrease the business’s full-time employee headcount.
- Level of payroll: loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-hiring: businesses have until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Loan forgiveness must be requested through the lender that is servicing the loan.
Starting on April 3, small businesses and sole proprietorships can apply for these loans. Starting on April 10, independent contractors and self-employed individuals can apply for these loans. All businesses – including non-profits – can apply for these loans. Businesses can apply until June 20, 2020, but are encouraged to apply as soon as possible, as there is a funding cap that may not get renewed. Businesses can apply for the loan through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union and Farm Credit System institution that is participating. Businesses should contact their local lender to determine whether they are participating. A sample application form is available here, so that businesses can determine what information they will need to submit with their application.
Loan Option 2: Disaster Loan
The first phase of COVID-19-related legislation authorized the SBA to make low-interest emergency disaster loans available to small businesses in areas that have been declared as “disaster” by the federal government. Due to the coronavirus, all U.S. states and territories have been declared disaster areas. These loans are direct loans from the federal government, in contrast to the PPP loans discussed earlier (which are processed through a financial institution or bank). The same limits on what is considered a small business discussed above apply to the SBA Disaster Loans. Also, these loans are only available to small businesses without credit available elsewhere; businesses with credit available elsewhere are not eligible.
An SBA disaster loan can be used for almost anything related to business expenses, including payroll, insurance premiums, rent, mortgage payments and monthly expenses. The loan funds cannot be used to purchase assets.
Loans may be granted in amounts up to $2 million, and the loan period is for 30 years with no closing costs. The interest rate for small businesses is 3.75% and is set at 2.75% for non-profits. A business must have existed for a minimum of 12 months to be eligible for the loan. The loan may also include a $10,000 grant for all small businesses applying for the loan. So, for example, if a business borrowed $100,000 under this plan, $10,000 of the loan would be forgiven as a grant, and the remaining $90,000 would be considered the loan.
In general, at any time, the SBA has $7-10 billion available in loan funds for disasters. Recent legislation has authorized an additional $40 billion for disaster loans related to the coronavirus.
To apply for an SBA Disaster Loan, click here. The estimated amount of time for completing the application is about two hours and loan approval is expected within 3-5 business days.