Seeking Business Debt Relief Through the CARES Act Stimulus Package
The COVID-19 pandemic has hit small businesses hard. Many are struggling with cash flow, lost revenue, and uncertainty about the future. The CARES Act stimulus package passed by Congress in March 2020 aims to provide some relief. This massive $2 trillion bill includes support specifically targeted at small businesses, including expanded SBA disaster loans and the Paycheck Protection Program.
-What can small business owners do to take advantage of the business debt relief options in the CARES Act? Here’s an overview of some key programs and strategies to consider.
Expanded SBA Disaster Loan Program
The CARES Act expanded the Small Business Administration’s existing disaster loan program to help businesses impacted by COVID-19. These low-interest loans can provide up to $2 million to cover expenses like payroll, rent/mortgage, and other bills. The loans can be used to cover expenses from February 15, 2020 onwards.
Unlike traditional SBA loans, the CARES Act makes these disaster loans available directly from the SBA. You don’t have to go through a bank. The CARES Act also provides for loan forgiveness if the funds are used to cover payroll, interest on debt, rent, and utilities during the 8-week period after loan origination. For any portion not forgiven, the loans have terms up to 30 years with an interest rate capped at 4%.
These SBA disaster loans can be a lifeline for small businesses impacted by COVID-19. The streamlined direct lending process and potential for partial loan forgiveness make them very attractive. The SBA has guidelines and an application on their website.
-Paycheck Protection Program
The CARES Act also created the Paycheck Protection Program (PPP), which provides essentially “free money” to small businesses to cover payroll and other expenses. PPP is open to small businesses, non-profits, self-employed/independent contractors, and gig economy workers.
PPP offers loans of up to $10 million at a 1% interest rate. These loans can be entirely forgiven if at least 75% of the loan is used to cover payroll costs, and the remainder is used for mortgage interest, rent, and utility costs over an 8-week period after the loan is made. The amount forgiven is not considered taxable income.
PPP loans are available through SBA-approved lenders like banks and credit unions. The SBA has a list of participating lenders on their website. Demand is very high, so apply as soon as possible.
Loan Deferment and Forbearance
Many lenders are also offering payment deferrals and other relief to borrowers impacted by COVID-19.
For example, the CARES Act requires lenders to provide up to 180 days of payment forbearance on federally-backed mortgages. This provides relief for homeowners struggling due to COVID.
-The CARES Act does not mandate loan deferment or forbearance for business loans or commercial mortgages. However, many lenders are voluntarily providing short-term deferment and fee waivers to business borrowers impacted by COVID.
If you have existing business loans or commercial mortgages, reach out to your lenders to see what sort of relief or short-term deferment they can provide. Be prepared to show financial records to demonstrate the impact of COVID on your business.
Tax Relief
The CARES Act also includes some tax relief measures that can help businesses conserve cash flow:
-- Employer payroll tax deferral – employers can defer payment of their share of Social Security taxes due between March 27, 2020 and December 31, 2020. Half of the deferred amount is due by December 31, 2021 and the other half by December 31, 2022.
- Net operating loss carryback – net operating losses from 2018, 2019, and 2020 can be carried back up to 5 years to offset income and get a tax refund. This provides quick access to cash for struggling businesses.
- Increased business interest expense deduction – for 2019 and 2020, the deduction limit is increased from 30% to 50% of taxable income. This allows businesses to deduct more interest expense and reduce taxable income.
- Accelerated depreciation deductions – businesses can take advantage of accelerated depreciation deductions for qualifying capital expenditures. This provides immediate tax savings rather than depreciating the assets over time.
Check with your accountant or tax advisor to model how these CARES Act tax provisions can help improve cash flow for your business. Every little bit counts when navigating COVID uncertainty.
Explore State and Local Relief
In addition to federal CARES Act programs, many state and local governments are also offering support for small businesses impacted by COVID-19.
For example, New York City’s small business continuity loan fund offers zero-interest loans up to $75,000. California’s disaster relief loan guarantee program can back loans up to $50 million from private lenders. Chicago’s small business resilience fund offers low-interest loans and grants.
Check with your state and local economic development agencies to see what emergency relief programs are available. Local non-profit lenders and community development financial institutions (CDFIs) may also have specialized loan funds or other assistance.
Get Creative with Vendors and Landlords
This crisis requires small businesses to get creative in managing costs and cash flow.
See if you can negotiate payment plans, discounts, or deferments with major vendors and suppliers. Can you pause or downgrade any recurring SaaS subscriptions? Take a hard look at every expense.
If you lease your commercial space, talk to your landlord about rent relief. Offer partial payment or request a temporary rent reduction. Landlords want to retain tenants and keep spaces occupied, so they may be willing to negotiate. Don’t be afraid to ask.
Buy Time by Managing Payables
With revenue down, manage accounts payable strategically to conserve cash.
Prioritize paying essential bills – payroll, rent, utilities, etc. Whenever possible, ask less critical vendors for more time or flexible payment plans. Pay the minimum on cards and lines of credit to avoid late fees or changes to terms. Consider reaching out to creditors to explain the situation and request temporary reduced payments.
Basically, pay what you must to keep the lights on and buy more time everywhere else. Cash is king, so conserve it where possible.
Reassure Customers and Ask for Support
Communicate openly with customers about the impact of COVID on your business. Share the steps you are taking to adapt. Ask for their support and patience.
Consider requesting deposits or prepayment for future work or services. Offer discounts for advance purchase of gift cards or service packages. Existing customers may provide a cash infusion to help you weather this storm. Reward their loyalty by keeping them informed.
Explore Financing Options
Despite stimulus programs, many small businesses are still struggling with cash flow gaps. You may need to consider financing to bridge the gap.
Traditional SBA loans beyond what’s covered by the CARES Act may be an option, albeit with stricter eligibility and terms. Equipment financing can spread out the cost of new purchases. Merchant cash advances leverage future credit card sales. Online lenders provide faster access to funds than banks.
These financing options were risky in normal times, but desperate times call for desperate measures. Evaluate the terms carefully and borrow conservatively. The goal is to buy time until business picks back up.
Plan for the New Normal
While debt relief programs in the CARES Act provide temporary aid, small businesses also need to start planning for the “new normal” after COVID-19.
How will your industry change? How will customer needs and preferences evolve? How will the recession impact spending?
Now is the time to think creatively about adapting your business model, offerings, and operations to whatever the next normal looks like. Consider ways to diversify revenue streams or leverage new opportunities emerging from this crisis.
With some strategic planning and creative thinking, you can position your business to prosper in the recovery ahead. Use this temporary slowdown to prepare and adapt.
Hang in There!
These are incredibly challenging times for small businesses. But there are resources available in the CARES Act and through other programs to help you navigate through it.
Take advantage of federal stimulus funds, tax relief, and financing options to stabilize cash flow. Get creative with cutting costs and negotiating with vendors. Communicate openly with customers and reassure them. Develop a plan to adapt to new realities.
With determination and resilience, small businesses can survive this crisis. Don’t be afraid to ask for help. We’re all in this together.