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In this episode, RJ Shara discusses the Coronavirus Aid Relief and Economic Security Act (CARES). The total package for the CARES act is about 2.2 Trillion Dollars. It’s a huge stimulus package considering that there are only 7 countries whose Gross Domestic Produce (GDP) in the year 2019 was more than 2 trillion USD. For comparison, India’s GDP was close to 2.8 trillion dollars in 2019 where the USA was at number one with 21.4 trillion dollars. Thus, the fund approved is close to 10% of the USA’s GDP.
Distribution of the 2.2 Trillion USD approved for CARES Act
This fund of 2.2 trillion USD is divided across 7 core groups. The biggest slice of the stimulus package aka $565 billion is reserved for Individuals who make less than $99,000 per year or families who make less than $198,000 per year. About half a trillion dollars is allocated for big corporations. 340 billion USD is allocated for the local and state governments. Finally we have a $377 billion package which will be handled and disbursed by the Small Business Administration(SBA) for sustaining small businesses. The remaining amount is distributed across education($44 billion), public health($153 billion) and includes a safety net of $26 billion.
SBA options for small businesses to benefit from the $377 billion stimulus package
Paycheck Protection Program (PPP)
350 billion USD is reserved for the Paycheck Protection Program(PPP). The PPP is distributed through 2 year loans for small businesses at an interest rate of 1%. If at least 75% of the loan amount is used to pay employee salaries then the entire loan will be forgiven. The formalities include a short 2-page loan application that is processed by many banks/credit unions and the businesses might already have a relation with them. The application deadline is June 30th, 2020. Since the application process did not start on the proposed date of April 3rd, there is a chance that the deadline might get extended. However, SBA is urging the small businesses to act quickly and submit their applications asap as the banks will be flooded with these applications and processing times will get impacted.
Eligibility requirements for the Paycheck Protection Program
The program is open for both, “for-profit” and “non-profit” businesses however the business should have been operational on February 15th, 2020. Businesses with fewer than 500 employees are eligible for this however there are exceptions to this limit. Hence the best course of action is for businesses to visit www.sba.gov and search for Coronavirus Relief Options. The PPP loan has a maturity period of 2 years and a low interest rate of 1%. The maximum loan amount that can be awarded will be 2.5 times the average monthly payroll cost that a business incurred in 2019. For businesses that started in January, the average payroll across January and February will be considered for baseline calculation. As the name suggests, this loan is meant to protect paychecks and hence employers are expected to maintain or rehire their employees. As long as 75% of the loan is being used for paying the employees, the business can avail complete loan forgiveness. Furthermore, the forgiven portion is subject to no taxation.
When calculating the loan amount that can be forgiven, any compensation for a single employee that is over 100 thousand dollars will not be considered. Neither payroll taxes such as FICA, Medicare nor the compensations paid to employees outside the USA will be considered. Along with that, any sick leaves, family leaves that have been covered in Families First Coronavirus Act will be ignored. If you have already applied for an SBA 7(a) loan then you are not eligible for this program.
After taking the loan if you are unable to maintain your employees for a period of minimum 8 weeks, then the loan forgiveness amount will be reduced proportionately. Small businesses barely have 2 months to act on this stimulus package and banks are already operating at reduced capacity so businesses will have to move quickly.
Other relief options available to the small businesses through CARES
There are 3 more programs being administered by the SBA. The first of these is the Economic Injury Disaster Relief Emergency Loan Advance (EIDL). Though it’s called a loan it is more like an economic grant of $10,000 since it need not be paid back. The business should be operational on 15th February 2020 in order to apply for this program and they have to prove that they have been negatively impacted by coronavirus.
Another program being administered by SBA is Express Bridge Loans and this is only available for enterprises that have existing relations with SBA and it gives them access to a fund of $25,000 very quickly. Similarly, SBA is providing financial support to small businesses during COVID-19 through SBA Debt Relief.
These programs will help small businesses in these dire times. For all the hustlers out there, it is worth remembering this quote by Robert Schuller, “Tough times don’t last, tough people do!” So stay strong and together we will sail through these winds of uncertainty and distress.
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