This week, businesses are considering whether or not to leverage forgivable loans that will be covered under the US Stimulus package. And, what you choose to do on that front is entirely up to you. But, if you are able to leverage additional capital to keep your operations running, you’ll want to be strategic about how you use it.
Let’s explore just a few of items today:
- How working capital attitudes are changing
- What is a Coronavirus relief loan?
- Actions you need to get a relief loan forgiven
- Bonus: Additional financial resources you can utilize
So, if you want to learn exactly what needs to be done to leverage newly-available small business funds to their full potential, read on.
In What Ways are Attitudes About Working Capital Changing Right Now?
Traditionally, what we hear from experts about working capital is advice about how to utilize your funds to move your business to the next stage of success or higher revenue. When trustworthy, this type of guidance has been helpful in the past. But, now, should you put this type of growth-driven counsel to work for you, or is it time to lay it on the backburner?
The unfortunate truth is that attitudes about working capital are becoming more fear-based. Only a couple of months ago, where gurus were telling you how to move to the next level, now they’re saying, “focus on retention, not growth.” And, depending on where your business stands right now, this is likely to be the direction you need to take.
If you’re losing customers, revenue, and staff, you definitely need to focus on retention — but don’t think about this like you normally would. You’ve always been told to put your customers first. And, while nobody in their right mind will ever tell you to stop thinking about your shoppers, your business should put someone else first right now: your employees.
Your staff members are the ones who do the daily grind and keep your machine moving. And, whether or not customers are spending or your state government is allowing you to stay open right now, your workers need to know you’re there for them. They want to know that you’re in this with them and that they have somewhere to come back to when this is all over.
If you didn’t think you had a way to help your staff, you’re in luck because light at the end of the tunnel is peeking in. The US government has come up with a way to keep small businesses open at very low costs to company owners.
A Coronavirus relief loan is one of two SBA-guarantee loan options open to small businesses in the US due to the COVID-19 pandemic. The US Stimulus bill, which has thus far been unveiled in three phases, included quite a bit of support for businesses with fewer than 500 employees.
So, these are the three phases of the Stimulus:
- Coronavirus Preparedness and Response Appropriations Act
- Families First Coronavirus Response Act
- Coronavirus Aid, Relief, & Economic Security (CARES) Act.
Each phase offers relief to the country in response to this global pandemic. And, phases one and three included help specifically for small businesses. During phase one, the low-interest Economic Disaster Relief Loan became available for companies affected by COVID-19. Then, when phase three was approved, the Paycheck Protection Plan (PPP) opened new doors.
What’s the COVID-19 Economic Disaster Relief Loan
An Economic Disaster Relief Loan is an existing small business loan available for companies with less than 500 employees who have been affected by a declared national disaster. As part of the Coronavirus Preparedness and Response Appropriations Act (phase one of the US stimulus), the COVID-19 pandemic was declared a national disaster. Hence, any US company that had experienced a loss of revenue because of the outbreak became eligible to apply.
Small businesses, homeowners, and renters in all US territories are now eligible to apply for a low-interest (0.5%) government-guaranteed loan designated to COVID-19 Relief.
And, What’s the Paycheck Protection Plan
The Paycheck Protection Plan is a second SBA loan that became available on April 3, 2020, in response to the CARES act. This plan is meant to “keep the workforce employed” during this time. If all employees are kept on a small business’ payroll for eight weeks, and spending meets certain requirements, the loan can later be forgiven. So, if you are able to utilize one of these “loans,” you can essentially get the money for free… as long as you use the funds according to the stipulations.
This bill will help small businesses including sole proprietorships, independent contractors (freelancers), and self-employed persons. A small business typically includes companies that have less than 500 employees. But, there are some exceptions. For example, if you are a restaurant owner with businesses in several locations, as long as each location has less than 500 employees.
If you’re not sure whether or not you might qualify, use the SBA Size Standards Tool.
The US Government Stimulus plan came in three stages. Stage one included a “Disaster Relief” loan option through the SBA. Now, stage three involves a new “interruption” or “Paycheck Protection” loan. These loans are low-interest and can be completely forgiven if you make the right spending decisions with the funds.
So, what might these decisions look like?
1. Invest at Least 75% of Funds Received Back Into Payroll
One of the main stipulations for Coronavirus relief forgiveness is that you invest 75-85% of the funds received into payroll, sick leave, or family leave for your employees. The amount that you must use for payroll depends on the amount of your loan.
- For loans less than or equal to $150,000, 85% of funds must be used for payroll.
- For loans greater than $150,000, 75% of funds must be used for payroll.
If you use only 74% of a $200,000 loan under this plan, your loan may not be eligible for forgiveness.
These loans are meant for payroll, rent, mortgage interest, or utilities. So, while you should use at least 75-85% of the funds for payroll, sick leave, or family leave for your employees (and/or yourself), the remaining 15-25% should only be used for building rent, mortgage interest, or utilities. So, keep accounting for all spending so that you can show what you’ve done with the money.
3. If You Will Invest in Growth, Consider Other Types of Funding
A Coronavirus relief loan is meant to keep employees of small businesses paid. And, while the 0.5% interest rate on these relief loans sounds enticing, don’t lose sight of other resources. For example, there is a good chance that, if your business credit profile is strong, you might find a better deal.
For example, you may be eligible for an introductory 0% interest credit card. So, if you pay the full amount off before the introductory period ends, you could end up saving money in the long run. So, while the Coronavirus relief options are a great deal, they are not your only option for support right now.
Additional Financial Resources to Take Advantage of
The US Stimulus isn’t the only relief you have at your disposal right now. Most companies are actually offering some sort of financial help at this time. If you have existing business debt, you should stay in the loop about what your lenders and card credit card issuers have to offer.
Here are some support channels worth looking into at this time.
- Discover has support in place for qualified customers who experience medical or financial hardship due to the Coronavirus pandemic.
- American Express may be able to lower your monthly payment, provide relief from late payment fees, reduce your interest rate, or prevent your accounts from going past due.
- Wells Fargo might offer fee waivers, payment deferrals, and provide other assistance for credit card, auto, mortgage, and small business and personal lending customers.
- CapitalOne has comparable relief options in place.
- Citi announced fee waivers, hardship programs, and additional small business support for existing customers.
If your financial institution isn’t listed here, and you’re struggling to fund operations, visit your lender’s website or call to find out what type of relief might be available.
When it comes to using Coronavirus relief funds, focus on your employees. If you’re in the fortunate position that you want to invest in growth at this time, consider other funding options. When the dust settles, you will be able to steer your ship back in the direction of growth. And, if you need help navigating rough waters right now or coming up with ideas, please reach out to me.