Monday April 27, 2020
The CARES Act and How it Works for Advisors and their Clients
Written by Randy Gold, EVP and CFO of SFA Holdings
Note: At the time of this posting, the nearly $350 billion initially allocated to the PPP had been fully allocated to businesses and agreement had just been reached for a second allotment.
These are unprecedented times, and like nearly all Americans, many within the SFA family are wondering when some sense of normalcy can return. In the interim, you are likely anxious about the fallout from the COVID-19 outbreak.
Thankfully, the CARES Act has the potential to provide some relief to the hardest hit among us. By now, you're likely familiar with the broad contours of the law and perhaps have even gone down the path of getting some assistance yourself.
At the same time, there is a fair amount of confusion about how the legislation works. To provide some clarity, below is a brief overview of the two provisions within the CARES Act that most impact the financial services industry: Economic Injury Disaster Loan and the Paycheck Protection Program.
Economic Injury Disaster Loan (EIDL)
The Small Business Administration is underwriting these loans, and advisors can apply at the SBA website. Filling out an EIDL application will only take a matter of minutes, limited to answering a few questions about your revenues, costs and ownership structure. The underwriting process, however, is far more extensive, so be prepared for that to take some time.
Other important considerations:
- Applicants can request up to $2 million.
- Loan proceeds, intended to replace some amount of lost revenue, must go toward operating costs, including accounts payable and interest (For the purposes of this loan, paying dividends or addressing other debts are not considered operating costs).
- Once the application goes through the underwriting process successfully, it is possible to receive an advance of up to $10,000 (Some news reports have described it as an advance of $10,000).
- For loans under $200,000, no personal guarantee is required.
- The interest rate is 3.75% (2.75% for non-profits) for up to 30 years (the terms are determined on a case-by-case basis), while payments can be deferred for as long as 12 months.
Paycheck Protection Program (PPP)
This program has created a bit more confusion, if not outright frustration, among the public than Economic Injury Disaster Loans. A big reason why is that while the SBA is the underwriter, banks process the applications – banks that, in many instances, are overwhelmed by the large volume of interest.
Because of this, many institutions are not accepting applications from non-customers. Your best chance, therefore, is to start with your existing bank – and to start now.
Other important considerations to keep in mind:
- Participants can get up to $10 million, and businesses will be limited to 2.5 times their average payroll costs over the last 12 months on record (typically 2019). Payroll costs include gross wages, health care benefits, retirement matching funds and state taxes paid by employer (Do not include payments to independent contractors).
- Both entities and self-employed are eligible to apply.
- The PPP is entirely forgivable if at least 75% of the proceeds go to payroll costs, the full loan amount is spent within eight weeks, the business retains its existing headcount (or rehires staff by June 30) and doesn't reduce salaries by more than 25% for employees making less than $100,000.
- If borrowers meet some but not all of the above stipulations, a pro-rated portion of the loan could be forgivable; whatever amount the government forgives, it's not taxable – a rarity for debt-forgiveness programs.
- Loans do not require collateral nor a personal guarantee.
- The interest rate is 1% and the term is two years, while payments can be deferred for up to six months.
Keep in mind that the SBA did not issue uniform guidelines on what information is required to present when applying for a PPP loan, so different banks may request varying bits of information from applicants. Be prepared, however, to provide a wide range of documents, including federal payroll forms for each employee, state tax information, benefits invoices, articles of incorporation and a list of all the owners of the business, including how much of the entity they control.
The SBA has also not yet issued final guidance on the details process for loan forgiveness, so that process remains a bit unclear.
The links to the Paycheck Protection Program application sites of some of the nation's most prominent banks can be found here: Ameris Bank, Bank of America, Chase, Citibank, Crestmark, Fifth Third, Radius Bank, Regions, TD Bank, US Bank and Wells Fargo.
SFA Holdings Executive Vice President and CFO
Disclosure: “SFA Holdings, Inc. does not offer legal or tax advice. Please confer with your personal legal and tax advisors.”