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If You’re A Small Business, Don’t Rule Out The Main Street Loan Program Just Yet

The federal government, in my opinion, has done a very good job providing relief for small businesses during the Coronovirus pandemic. The Paycheck Protection Program, despite its early miss-steps, has delivered more than half a trillion dollars in needed funds. Payroll tax deferrals and tax credits have helped ease cash strains. Additional unemployment checks have assisted many freelancers and independent contractors.  But if you’re a certain type of small business owner, there’s one federal program that you should also strongly consider, despite what some people are saying. That’s the Main Street Lending program.

The Rundown

The program – which will be launching very shortly – is not without good intentions.  Backed by the Federal Reserve, it’s making available as much as $600 billion in loans through participating financial institutions. At first, the program was designed mainly for mid-sized companies. But now those requirements are relaxed and a good many small businesses should have an interest. Granted, this is not for all small businesses. The minimum loan amount is $250,000 (and many are lobbying for that to be reduced to as low as $100,000).  The Fed, which started signing up bankers on June 15 and is accepting comments on their most recent version through June 22, will underwrite 95 percent of the loans. 

Even so, the program is meeting with tepid response. “As much energy and excitement as there was and has been around the PPP, we’ve not seen or felt that around the Main Street program,” Jim Donovan, the head of commercial and industrial lending at Bryn Mawr Trust in Pennsylvania told American Banker. “Yeah, I know [the Fed] has been adjusting it and making revisions along the way. But literally, the inquiries I’ve received have been two or three.”

This isn’t surprising. Most mom and pops wouldn’t meet the income requirements needed to qualify even for the minimum loan amount. Many have received PPP money already and many others are applying for help through the Small Business Administration’s Economic Injury Disaster and other loan programs. Others still aren’t crazy about taking on any additional debt. But there are lots of incentives buried in the details that could be appealing.

For example, Interest rates are variable and will fluctuate as general rates increase (or decrease). The interest rate is LIBOR (1 or 3 months) + 3%, with interest payments deferred for one year. Maturity terms are only five years, but principal payments are deferred fully for the first two years, amortized 15% for the third and fourth years, and 70% on the fourth year before it matures on the fifth.  So it’s a lot of low-cost money that doesn’t require payback for a while.

These terms to me are attractive. But I have two other big reasons why a small business who qualifies should consider applying.

Reason #1

The first is that business owners need cash. As I write this, the first wave of the pandemic continues to spread across the country. Cases are rising in some areas. There is no vaccine yet and even the scenarios aren’t predicting general availability until at least the end of the year or most likely sometime early next year. Death rates are coming down and alternative therapies are becoming more available. But doctors and public health officials still remain very worried about a potential second wave that could – voluntarily or involuntarily – cause more shutdowns and another serious economic slowdown. In other words, there is still much uncertainty – more than at any time I can personally remember in the 25 years I’ve been running my business.

Hopefully, things will turn out OK, but smart business owners don’t hope.  They plan. If the worst case scenario does occur, then cash will be needed. If you’ve got plenty of reserves still, then good for you. But, if like most businesses, you have less than six months of operating capital, you’re going to need as much cash and cash availability as you can muster. So here is a loan program specifically designed for that purpose. By applying for the loan and then banking the cash and then managing it prudently, you can then have resources on hand for if things turn south. If you wait, those resources may not be as readily available for if things really do turn south.

Reason #2

One word: prepayment. The loan program doesn’t penalize you if you pay back the money early. So you don’t want to incur a lot of long-term debt? I get it. But how about entering into a short term arrangement where you’ve positioned yourself with cash and if you don’t need the cash you just pay it back, no harm no foul. 

The loan program certainly has many rules that would likely disqualify the majority of small businesses and mom and pops applying. But for the hundreds of thousands of businesses that would qualify, it’s an affordable – and readily available – source of capital that could be pivotal in helping you navigate the very unprecedented and uncertain next six months. So I say if you’ve got the ability, then get the money. Stick it in the bank and stare at it. If you don’t need it, then just give it back. But boy, if you do need it you’ll be really happy that it’s there.

Forget the PPP and EIDL. Here’s How The CARES Act Can Help Fund Your Business

There’s been a lot of attention given to the CARES act – the legislation passed March 27th which provided relief to small businesses in the wake of the Coronavirus pandemic.  The big news surrounded the Paycheck Protection and Economic Injury Disaster Loan programs. Both have already provided billions in aid to small businesses but have also been criticized for their complexity, delays, and the way funds have been distributed.

Regardless of the above programs, there are at least three other significant financing options that the government has provided which are not getting as much attention. If you’re running a small business you should know about them.

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Payroll Tax Deferrals

Whether or not you participate in the Paycheck Protection Program, you can defer all of your employer payroll taxes (that’s the FICA 6.2 percent tax) with half becoming due by the end of 2021 and the remaining half due at the end of 2022. True, this is just a deferral of taxes so you will owe the money.  However, it’s an interest free loan for those amounts and 6.2 percent adds up each month. You don’t have to apply for anything. You just stop paying and then make sure that’s reflected on your quarterly Federal 941 returns. Ask your accountant, your attorney or your payroll service for help if you need.

Employer Retention Tax Credit

The Employer Retention Tax Credit is not a deferral.  It’s literally a forgiveness of your employer (again, FICA) taxes where you can even get money back if the credit exceeds what you owe. You have to have been significantly impacted by the pandemic which means either you’ve been forced to shut down or your revenues in a quarter are more than 50 percent less than they were in the preceding year’s quarter.

The credit is 50 percent of each of your employee’s quarterly salary up to $10,000 or a maximum of $5,000 per employee. If you add that up, it’s pretty huge. Like the payroll tax deferrals above, you don’t have to “apply” for anything – you just make sure it’s reflected on your Form 941 and again get help from experts if you need. If your tax credit is higher than the taxes you owed then you can apply to a future quarter or get the money back in cash.

Section 7(a) Loans

The above two programs can provide significant funding for your business and they’re both effective through December 31st.  However, there’s a third form of funding that’s effective only through September 27th.  That has to do with the Small Business Administration’s Section 7(a) loans.

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The 7(a) loan program has been around for a while. They’re provided through member lenders and are for small businesses (less than 500 employees) who need financing that they otherwise couldn’t receive without the SBA backing the loan. Your financing can be to buy a business, real estate, inventory or equipment. Or it can be just for working capital.  The loan terms vary from 5-25 years depending on what you’re using the money for and interest rates will vary based on the prime rate.

But here’s the thing: thanks to the CARES Act, borrowers that were issued 7(a) loans between March 27 and September 27 will see their first six months of principal, interest and fee payments waived – and the principal balance will continue to be reduced. For example, a business owner getting a $500,000 loan at 6 percent interest would save $33,000.

The Real Value in CARES

I’ve spoken with many financiers and they all agree that this is unprecedented. You can use this money to grow your business. You can hire people, buy out a competitor, snap up some older equipment or a piece of real estate. It’s a form of financing that will not only help a business survive the current economic downturn, but help that business owner grow beyond the pandemic.

If you’ve received a Paycheck Protection or Economic Injury Disaster Loan, then good for you. But if you have the opportunity to take advantage of the tax deferrals, credits or a new Section 7(a) loan then you should be jumping on it. Speak to your advisors and take advantage. It won’t last forever.

For more information on the CARES Act, read the U.S. Department of The Treasury statement here.