The Independent Investor: Small-Business Owners Run Into Red Tape

The $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act has two programs that can help America's business owners to weather the COVID-19 storm. 

 

The $349 billion, first-come, first-served loan programs have seen an overwhelming response from troubled small-business owners nationwide. The job is to get the money into their hands quickly.

 

The challenge will be to remove or amend a mountain of regulatory requirements that the Small Business Administration and the financial sector have had in place for decades. Adding to the confusion are the owners themselves, who are either not aware that there are actually two loan programs or aren't sure which to apply for.

 

The Economic Injury and Disaster Loan (EIDL) offers owners up to $2 million for working capital needs like fixed debt and payroll. The interest rate is 3.75 percent (1 percent less, if you are a non-profit) and the term of the loan can be up to 30 years. 

 

There is an automatic one-year deferment of repayment. That means the first payment is not due for 12 months, although interest starts on the date of disbursement.

 

If you apply for the EIDL you can also apply for a up to $10,000 advance for working capital at the same time. This entire application can be done online and no additional documentation, like tax returns or personal financial statements, are required. The SBA claims that the $10,000 grant (which does not have to be repaid) will be on its way within three days after the application is filed.

 

The second loan program is called the Paycheck Protection Program (PPP). This loan can amount to as much as $10 million or 2.5 times the average monthly payroll costs of the company's previous year. The proceeds can be used for payroll costs, health insurance, salaries/commissions, rent and mortgage interest, utilities and other business interest incurred after Feb. 15, 2020.

 

In order to receive this loan, you need to apply through an SBA-certified lender beginning on April 3. This process can take several weeks. This loan, which may be partially forgivable, must be applied for by the end of June 2020.

 

The greatest potential benefit of the PPP loan is that the amount of the loan eligible to be forgiven is the amount you spend during the first eight weeks of the loan on group health insurance premiums and other health-care costs, payroll costs, rent (pursuant to a lease in force before Feb. 15, 2020), and utilities such as electricity, gas, water, transportation, telephone or internet access expenses for services. These expenses must have been in place before Feb. 15 of this year.

 

If it sounds too good to be true — wait — because there is a catch. In order for the amount to be forgiven, the company must maintain the same number of employees during a certain time period, for example, from Jan. 1, 2020, to Feb. 29, 2020. There are further stipulations involved, so be sure to read the guidelines of the PPP loan. 

 

You can apply for both loans, but you cannot use the proceeds for the same expenses. Further, the up to $10,000 grant (EIDL) gets deducted from the forgivable portion of the PPP loan.

 

The potential demand for these loans by the roughly 30 million small businesses in this country could swamp the program. The government recognizes this and promises to replenish the well once it has gone dry. Congress is now working on another $250 billion bill to supplant the existing programs. But in the meantime, there appear to be all sorts of hurdles from the simple intake and processing side to questions of risk and security.

 

Banks, for example, are worried about the creditworthiness of these new customers. Loan officers like to lend to those they know, companies with a credit history with their department.

 

As such, from the bank's point of view, it would only make sense to grant those existing small-business customers priority in the loan processing. But that's not the program's intent.

 

And then there is the Financial Crimes Enforcement Network (FinCEN). Money laundering has long been a challenge. FinCEN has charged the nation's banks to develop and uphold an exacting process, which involves stringent background checks of every new client ever since the terrorist attack on the World Trade Center.

 

These know-thy-customer regulations, together with the processing time and credit checks, could mean months before approval is granted. Of course, that flies in the face of the congressional intent of the bill, which is get the money in the hands of small businesses immediately.

 

This week, the Federal Reserve Bank added its weight to backstop the programs. They have committed an additional $2.3 trillion to buy up these CARES loans like PPP and EIDL, as well as other fixed income financial securities.

 

Hopefully, between the Fed's actions, pressure from lawmakers, and the business public, the SBA and the banks that elect to provide loans, will work out the kinks. We are all counting on them to deliver. I think they will.