“Get cash now” is the tag line in an ad offering cash to someone with a structured settlement. It’s also the battle cry for small businesses trying to survive this war against COVID-19. Many small businesses do not have enough cash flow needed to continue, but here are 3 ways to get cash quickly that may just help you through this viral and economic pandemic. Determine which you qualify for, how much you can obtain, and what it will cost you so that you can decide how to move ahead.
Economic Injury Disaster Loans (EIDLs)
Overview. This is a direct loan from the SBA for a business experiencing economic injury resulting from COVID-19. Funds can be used for working capital, inventory, equipment purchases, and operating costs.
How much can you borrow. The limit on a loan under this program is $2 million, based on actual economic injury.
Interest rate and loan term. The interest rate is 3.75% for businesses. Repayment is up to 30 years. But there’s automatic deferral of all principal and interest for all of 2020 (but interest accrues during this period). But an EIDL may be refinanced into a PPP loan (explained later) to obtain loan forgiveness.
Personal guarantee and collateral. A personal guarantee is required only for loans of more than $200,000 (and then only by owners with a more than 20% ownership interest). Collateral is required only for loans greater than $25,000, but the SBA is waiving this requirement on a case by case basis.
Other factors. You can obtain an advance up to $10,000 as an emergency payment once you submit your loan application (you should receive the advance within days of submission). The advance does not need to be repaid if the loan is denied. This loan program is available through December 31, 2020 (unless it gets extended).
Paycheck Protection Program Loans
Overview. The Paycheck Protection Program (PPP) is a loan program in which loans are obtained through SBA-certified lenders (existing SBA 7(a) lenders or federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating). PPP is designed to help small businesses cover overhead, including payroll, mortgage/rent, and utilities.
How much can you borrow. The limit on borrowing is 2.5 months of payroll costs (salaries, wages, commissions, various leave payments, health care premiums, retirement benefits, and payroll taxes) incurred in calendar year 2019, with a maximum loan of $10 million.
Interest rate and loan term. The interest rate is 1%. The loan has a maturity of 2 years. And there’s automatic deferral for 6 months (interest accrues during this period). But there’s potential loan forgiveness. The amount of forgiveness is limited to 8 weeks of funds applied to payroll costs, mortgage interest or rent, and utility expenses. But forgiveness is reduced proportionally by any reduction in the number of employees or 25% reduction in payroll as of June 30, 2020, compared to pre-February 15, 2020, levels. At least 75% of the amount forgiven must relate to payroll costs. The amount forgiven is not taxable income.
Personal guarantee and collateral. There is no required personal guarantee or any collateral.
Other factors. This loan program runs only through June 30, 2020 (unless it gets extended).
Resources. Get information about the PPP from the SBA.
Loans and distributions from qualified retirement plans
Overview. You can tap into your own accounts for quick cash. Typically, you can obtain funds within days of your request.
How much can you borrow. If you have a qualified retirement plan that allows you to take a loan, you can borrow up to $100,000 if it’s related to COVID-19. (There’s no borrowing from an IRA other than taking a distribution and re-contributing it within 60 days.) As an alternative to a plan loan, or in addition to it, you can take a distribution from your plan. Coronavirus-related distributions up to $100,000 are not subject to an 10% penalty if you’re under age 59½.
Interest rate and loan term. The plan must charge a “reasonable rate” of interest. Given that the Fed Funds rate is now zero, the interest rate for a plan now should be very low. The funds must be repaid in level amounts over a period not longer than 5 years. But you can pay it off earlier, with no prepayment penalty. If you take a distribution, it is taxable, but this can be spread over 3 years. Tax is avoided entirely if the distribution is repaid within 3 years, and the repayment has no effect on your ability to make current contributions to the plan.
Personal guarantee and collateral. There is no personal guarantee or collateral required for a plan loan.
Other factors. Funds in retirement plans are meant for retirement income. Using them for business cash needs should be a last resort. But these loans and distributions are easy to arrange.
Resources. The IRS will post information about coronavirus-related plan loans and distributions on its Coronavirus Tax Relief page (there are no details as of this posting).
If you need cash, take action now. Decide which source of funds is best for your situation. Talk with your CPA, payroll provider, or other financial adviser to get your numbers in order so you can complete the loan application (you don’t need this for loans from your own retirement plans). Good luck.