The Independent Business Guide to The CARES Act
The CARES Act refers to the legislation passed by Congress on March 27th to help owners of small and medium-sized business owners impacted by the Coronavirus. The legislation involves multiple programs and additional funding for counseling services that help small business owners navigate these programs.
From the perspective of an independent consultant, the two main programs to be aware of include the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) & Grants. In this article, we’ll provide a bit more detail on the CARES act and its associated programs, review how CARES can help independent consultants, and provide some guidance on how to apply to its key programs.
What Is the CARES Act?
CARES stands for the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act was passed by Congress to provide business owners with much needed liquidity to ensure their businesses have the cash they need to pay employees during government mandated shut downs. Of course, most observers and Congress expect some sort of extended economic recession, and these programs are intended to help businesses navigate the longer-term impact of COVID-19.
The most comprehensive way to review what is included in the CARES act is to read this PDF developed by the Senate Committee Small Business and Entrepreneurship. However, we’ve attempted to distill the 850-page bill into key insights for business owners and independent consultants.
Again, the CARES Act consist of the following programs:
The Paycheck Protection Program (PPP) – provides an extremely low-cost loan intended to cover the costs of keeping employees on payroll
Economic Injury Disaster Loans (EIDL) and Economic Injury Disaster Grants (EIDG) – provide small infusions of cash immediately to help keep a business afloat in the next few months. Be careful that you know when you are applying for a loan and when you are applying for a grant!
Small Business Debt Relief – this provides debt relief for small businesses that already have SBA (Small Business Association) loans
Free and Enhanced Counseling – local Small Business Development Centers (SBDC), Women’s Business Center (WBC), or SCORE mentorship chapters will receive additional funds to expand their reach and better support small business owners with information regarding COVID-19. To find a local resource partner, visit https://www.sba.gov/local-assistance/find/
CARES Act Summary
Most small businesses with fewer than 500 employees are eligible. You can be an LLC, an S-Corporation, a sole proprietor, or operate as a 1099 contractor or self-employed individual. This means that if you drive an Uber or are an independent business consultant, you are eligible.
The fastest way to receive funds to help keep a business afloat is likely the EIDL, or Economic Injury Disaster Loan, followed by obtaining an Economic Injury Disaster Grant. These loans/grants provide an emergency advance of up to $10,000 to small businesses and private non-profits within three days of applying.
Basically, you first apply for an EIDL (which provides for loans up to $2,000,000, with a 3.75% maximum interest rate) and then request the $10,000 advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay other business obligations.
The Paycheck Protection Program (PPP) is a separate program specifically intended to help businesses meet payroll obligations. PPP provides cash-flow assistance through federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll, the loans are forgiven, helping workers remain employed and small businesses to remain viable and ready to grow when the crisis ends. Businesses can request a loan for up to 2.5X their average payroll, up to a maximum of $10,000,000. The maximum interest rate under the CAREs act legislation is 4%, but currently the Treasury department plans on setting the interest rate at 0.5%, making it effectively an interest free loan.
Some Paycheck Protection Program Features:
Forgiveness of up to 8 weeks of payroll
No SBA fees
At least six months of deferred payments
Small businesses and other eligible entities will be able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020.
Can One Apply For Both?
In theory, a business can benefit from both the Paycheck Protection Program and Economic Injury Disaster Loan (EIDL) & Grants. If you receive an EIDL, it is subtracted from the maximum PPP loan you can receive. The government specifically states that it is OK to apply for both a PPP and EIDL, as long as you are using each for different purposes and can explain why both are needed.
How Can the CARES Act Help Consultants?
The CARES act should be applicable to most independent consultants, whether they are operating as an independent contractor or have set up an LLC or S-Corp under which to operate. In either case, you are considered a small business and can apply.
Because any Economic Injury Disaster Loan (EIDL) or grant received is subtracted from your eligible Paycheck Protection Program loan, which has a higher value, let’s focus on how PPP helps consultants. Basically, the PPP stipulates that meeting the “payroll” for the owner can be the rationale for the loan, up to a maximum of $100,000 in annual salary. This effectively means that if you operate a single person consulting firm, you would be eligible for a loan of $100,000 / 12 (your monthly payroll) or $8,333.33 * 2.5 = $20,833.33.
From what we understand at this point, if you ultimately make $100,000 or less in income in 2020, two months of payroll, or ~$17,000, could be forgiven (i.e., you would not have to pay it back).
Of course, business owners must document what the funds were used for to have the loan forgiven. There will be paperwork involved, but it seems like a very attractive program for independent consultants to pursue.
How Do I Apply for The Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDL) & Grants?
To apply for an EIDL online, visit https://disasterloan.sba.gov/ela/ . Your SBA District Office is an important resource when applying for SBA assistance.
All current SBA 7(a) lenders (see more about 7(a) here) are eligible lenders for the PPP program. The Department of Treasury will also be in charge of authorizing new lenders, including nonbank lenders, to help as many small businesses as possible to take part in this program. Most major banks of which you are aware, from Chase to Bank of America to Wells Fargo, are SBA7(a) lenders and you can obtain a PPP loan by visiting their websites.
Many independent consultants may be surprised to learn that they are eligible for the Paycheck Protection Program. The federal government is essentially saying that it will cover you for 2.5 months of salary, up to an annualized salary of $100,000. This is obviously a substantial benefit.
This legislation was developed quickly and certain elements of its implementation and execution remain unclear, but even if the process by which these loans are forgiven becomes difficult to navigate, the loans are effectively interest free. The worst possible case would probably be that you spend the time to obtain the loan but are ultimately asked to pay it back when you expected it to be forgiven. The best case seems to be that you are effectively given up to $20,000 from the government to help you deal with the impact of COVID-19.