Most businesses are either starting to experience sharp negative effects to their operations or are worried that their business will decline due to the coronavirus outbreak. With the number of infections changing by the hour and cities shutting down businesses temporarily to curtail the outbreak, business owners are left to wonder if their companies would survive the ordeal. Many are looking to cut costs by sending employees home while others are hoping the US government will help them and their employees. For most, the most pressing issue is to maintain adequate liquidity as revenues decrease sharply. One sure way to improve liquidity is to secure extra financing in the form of loans. Below we examine what are the options that business owners have in order to secure that extra cash and give their business a fighting chance to survive the crisis.
Please keep in mind that the government intention is for the proceeds of the loans to be paid to employees and US workers and as a result, foreign business owners on E2 visa, L1 visa, O1 visa, EB-5 visa, EB-1 and any other visa status that alows them to do business in the US and hire workers are eligible to apply for the SBA PPP loans and EIDL loans. However, SBA has been recently denying EIDL loans to businesses owned by foreign nationals on temporary visas such as the E2 visa, E1 visa, L1 and O1 visa. If you are in this situation, please contact us at firstname.lastname@example.org or 786-410-6841 to tell us your experience as we work to inform the government representatives of the current denials. Also, you can click on this link to read our article and watch our Youtube video on this subject.
The SBA PPP program applies to sole proprietorship, independent contractors and self-employed persons.
- Paycheck Protection Program (PPP). The PPP established by the CARES ACT is an SBA loan fully guaranteed by the U.S. government that helps small businesses retain their workforce employed during the COVID-19 pandemic. The program can be accessed through local banks in each State that are SBA 7(a) lenders, through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. The PPP is available through August 8, 2020.
This program is available to small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), 501(c)(3) non-profit organizations, 501(c)(19) veterans organizations, or Tribal businesses affected by coronavirus/COVID-19. If one or more of your company’s owners is not a U.S citizen or domiciled in the U.S., the company still qualifies. The loan will be fully forgiven essentially transforming it into a grant if the funds are used for payroll costs, interest on mortgages, rent, and utilities (at least 75% of the forgiven amount must have been used for payroll). The first payment does not start until 6 months after the note is issued. The loan requires no collateral and personal guarantee, and there are no charges and fees associated the application. The loan must be repaid within 2 years and the interest rate is 1%.
- SBA Loans – the Small Business Administration works to help small businesses in the United States. One of the ways the SBA helps is by guaranteeing loans, either fully or in part, made to private US businesses by commercial lenders such as banks. The SBA does not provide funding directly. Recently, President Trump announced an additional $50 billion of loan guarantees will be made available by the SBA under the Economic Injury Disaster Loan Program to small businesses that have been hit by COVID-19 outbreak. That comes in addition to other SBA programs, already available to American businesses.
- Economic Injury Disaster Loan Program (EIDLP) – is designed to help business owners weather the economic effects of natural disasters. The program has been available to small businesses that suffered the effects of hurricanes Michael and Florence. Currently, the US government is making this program available to business that suffer the effects of the COVID-19 epidemic. Under this program, the SBA can guarantee working capital loans of up to $2 million that can provide vital economic support to small businesses and help them mitigate the temporary loss of revenue they are experiencing. These loans are available only for areas that are deemed to be affected and coordinated with the governor of that state or territory. These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%. SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay. Below we will look at how the program is implemented in the state of Florida.
As of May 1, 2020 the funds allocated for the EIDL Loan for the COVID 19 related injury and established under the CARES ACT have ran out. On June 15, 2020, the SBA has resumed accepting new EIDL loan applications from all qualified small businesses, including US agricultural businesses.
The EIDL Loan Advance established by the CARES ACT will provide up to $10,000 of economic relief to businesses that are experiencing temporary difficulties and loss of revenue due to the COVID-19 pandemic. The program is for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19. The EIDL Loan Advance does not have to be repaid.
- 7(a) Loan Program – under this program SBA guarantees 85% of loan amounts up to $150,000 and 75% of loans up to $5 million which is the maximum amount. These guarantees are available for eligible small businesses within the U.S. States and its territories. The uses of proceeds include working capital; expansion/renovation; new construction; purchase of land or buildings; purchase of equipment, fixtures; lease-hold improvements; refinancing debt for compelling reasons; seasonal line of credit; inventory; or starting a business.
- SBA Express – loan program provides loans up to $350,000, with a 50% guarantee from the SBA, for no more than 7 years with an option to revolve. There is a turnaround time of 36 hours for approval or denial of a completed application. The uses of proceeds are the same as the standard 7(a) loan.
- 504 Loans – program is designed to foster economic development and job creation and/or retention. It allows businesses to purchase owner-occupied commercial real estate and equipment while retaining working capital. The eligible use of proceeds is limited to the acquisition or eligible refinance of fixed assets. The guaranteed loan amounts are up to $5 million and require a down payment of at least 10% of the asset purchase value.
- Export Assistance – provides export loans to help small businesses achieve sales through exports and can help these businesses respond to opportunities and challenges associated with trade, such as COVID-19. The loans are available to U.S. small businesses that export directly overseas, or those that export indirectly by selling to a customer that then exports their products. $500 to $5 million for working capital.
- Florida Small Business Emergency Bridge Loan Program – announced on Monday, March 16th by Governor Ron DeSantis, the program is designed to help Florida businesses with 2 to 100 employees stay in business. The loans are up to $50,000, bear no interest, and are payable in one year. Small businesses in Florida that have suffered economic injuries because of the coronavirus epidemics can apply for these loans until May 8th, 2020.
- Commercial Lending – banks are continuing their operations despite the coronavirus epidemic although with a reduced staff and many of their employees working from home. Bank are a convenient place to turn to since most business owners already have a business bank account with at least one commercial bank. Calling your current bank representative has the advantage that it can shorten time and reduce the need for paperwork. However, banks are for-profit institutions that would want to preserve the principal they landed and charge interest as well as fees. Given the current crisis, many of them have started to tighten credit standards. In addition, banks’ clients that had lines of credit in place before COVID-19 epidemic have started drawing on them shore up liquidity, putting strain on the banking system. The Federal Reserve have intervened to help the banking system and encourage lending by lower interest rates to almost 0%, eliminating reserve requirements and cheap loans to bank with government bonds and mortgage backed securities as collateral.
- Commercial Paper – To support the credit needs of US businesses, the Federal Reserve announced on March 17th that it will establish a Primary Dealer Credit Facility, or PDCF. The facility will give primary dealers access to capital in exchange for collateral. Under PDCF, a primary dealer can use commercial paper (unsecured short-term debt, typically used for working capital) issued by a private business as collateral for loans, effectively transferring the risk back to the Federal Reserve. The PDCF will offer overnight and term funding with maturities up to 90 days and will become available on March 20, 2020. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities. The interest rate charged will be the primary credit rate, or discount rate, which currently stays at near 0%. The downside to using commercial paper to fund working capital needs is the business using it has to larger and with investment grade credit rating.
- Extending accounts payable – in the absence of adequate funding from lending institutions businesses can always turn to each other. A business, that is short on cash can ask suppliers or creditors to defer receiving payment for a later date. By doing that a company can conserve cash and maintain operations. The downside to asking for extra time to pay bills is that if your business in a difficult situation probably the one of your counterparties is struggling too and you are not the only one to ask for more time. In situations like the current, it is often useful to turn to an attorney to examine all contracts with suppliers for provisions that allow for the delay of payment. It is also a good idea to have an attorney review all customer contracts and advise on which customers have provisions that allow them to delay paying. That will help a business to improve cash management and anticipate payment delays.
Malescu Law P.A. – Business & Immigration Lawyers