CARES: An Updated Down-to-Earth Guide for Entrepreneurs

Just when it seemed things couldn't get more crazy for small business, the government passed the CARES Act. A centerpiece of this act is a $349 billion "handout" to small businesses. In the article Free Money for Your Business? I've already discussed key decision points as you evaluate your options under CARES. This article is an update.

If you're new to the discussion, there are three main CARES programs that potentially offer "free" money to entrepreneurs:

1. Emergency Injury Disaster Loans (EIDLs). I’ve called this Program 1.
2. Paycheck Protection Program (PPP) Loans. Calling it Program 2.
3. Employee Retention Tax Credit. You guessed it - Program 3.

Here is a painfully oversimplified chart from the last article:

Here is what I've heard and seen on the street the past several days:

Point 1 - There's been a huge movement to apply for PPP loans

Many businesses are realizing they can honorably certify A) they need a PPP loan due to “uncertainty” and B) they will use the proceeds to “retain workers or maintain payroll.” Of the three programs, the energy right now is almost entirely on PPP loans. The strong attraction is forgiveness of part or all of the loan if it used for payroll and a few other expense types.

Point 2 - It appears PPP loans truly are available to virtually all enterprises with less than 500 employees, including:

1. Churches and non-profits. However, churches without an official 501(c)3 designation may struggle to prove their status.
2. Sole proprietors (even those without payroll). For those without payroll expense, the PPP loan amount is based on prior year tax return income, 1099s, or other evidence of income. Practically, the maximum PPP loan for a sole proprietor without employees is $20,833 (2.5 months of the maximum $100,000 annual net income).
3. Farms. However, many small farms have no payroll expense (or taxable income for that matter!) so this may not help small farmers much.
4. There are a few exceptions like financial institutions, certain landlords, etc., but the exceptions are surprisingly few.

Point 3 - I cannot see how the $349 billion for PPP loans will hold out, unless Congress replenishes the well

Anecdotal evidence from my own little world indicates banks are getting deluged with applications. Some of these loans are huge - into the seven figures (the maximum amount per loan is $10 million!). I cannot imagine those dollars extrapolated across the entire United States.

Also, it appears some banks are doing better than others at getting applications into the SBA pipeline. Applications are definitely going through, so if your bank doesn't have a system in place yet, it appears like it may a bit behind.

Point 4 - EIDL loans (Program 1) are perhaps a bit of a letdown

I've heard of several folks who applied for the quick $10,000, or even larger amounts. I have not heard confirmation from anyone yet that they actually received any money.

Further, it's becoming increasingly uncertain whether you can get both the free $10,000 from EIDL and full forgiveness of your PPP loan. The SBA guidelines are murky, but it almost appears like your PPP loan forgiveness is reduced by the EIDL $10,000. If that turns out to be true, I can't see the advantage of the EIDL. Admittedly, there wouldn't be any harm either, and it certainly is fine to apply to both programs.

I fear the overwhelmed SBA is going to struggle with the paperwork if someone gets money from both programs. As the Morning Brew mentioned the other day "The SBA wasn't exactly Agency of the Month even before the crisis." I say that charitably, because I'm sure I'd be pulling my hair out if I was the SBA right now.

I'm not saying don't apply for an EIDL, but it's looking like less of a slam dunk than it originally did.

Point 5 - If you decide not to apply for a PPP loan, there's always the potential for taking the payroll tax credits (Program 3) later

Program 3 is getting very little press, but it's actually a powerful program. I've more fully described it in my first article. If you qualify, there's no loan to apply for - you simply get the money back when file your quarterly payroll tax forms (or sooner if you want).

In some cases the potential $5,000 credit per employee could actually be better than PPP loan forgiveness. This is especially true if your employees are currently laid off, your sales are way down, and you expect a bit of a rebound in payroll and sales later in the summer.

One of my clients said he simply doesn't have the time or energy to think about a PPP loan right now. He agreed to keep the tax credits in mind when it comes time to file his 941s. Who knows, he might be the one smiling in the end!

Point 6 - I continue to urge patience, faith, and common sense

I've been updating my clients with an almost nightly email this week. In Friday's edition I said this:

"I'm not writing these emails to generate a wild “money grab” mentality. Let’s not lose our moral compass in the heat of the moment. I’ve felt a moral obligation to make you aware of the easy money that’s out there for impacted businesses. However, if you’re running say a coronavirus research center, this bailout program is not for you! Let’s keep that clear."

My point is there is genuine help for businesses facing uncertainty. But if that legitimate help leads to greed or dishonesty, I believe a character test has been failed. Physical, mental and spiritual health is more important than extracting the last dollar from the CARES Act.

To all the Weary Leaders, business owners and entrepreneurs out there...hang in there. Times like these come to pass, not to stay!