On March 27, 2020, the CARES Act, (Coronavirus Aid, Relief, and Economic Security Act) was signed into law in the United States. It contains $376 billion in relief for American workers and small businesses, which will be implemented in a variety of forms. And if you have a small business or are self-employed you may be eligible for an SBA loan for your business.
- The SBA has made funds available for small businesses
- Self-Directed IRA and Solo 401(k) users are generally not eligible
- If you have a small business, an SBA loan may keep you afloat
On March 31, 2020, The U.S. Department of the Treasury and the Small Business Administration (SBA) released the loan application form for businesses to apply for loans under the CARES Act. The Paycheck Protection Program provides $349 billion in small business loans to cover qualified payroll costs, rents, utilities, interest on mortgage, and other obligations. Applications can be submitted through an SBA and Treasury approved bank or credit union, listed here on the SBA site.
Paycheck Protection Program
With the Paycheck Protection Program, the initiative provides 100% federally guaranteed loans to small businesses. For these purposes, businesses must have fewer than 500 employees, and this includes small businesses, as well as qualified nonprofit organizations, sole proprietorships, independent contractors, and self-employed individuals.
A business in the accommodation and food services industry with more than one physical location qualifies if it employs no more than 500 employees at each location. For purposes of eligibility, the SBA’s affiliate rules are waived for businesses in the hospitality and restaurant industries, franchises approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program. Each business can receive the lesser of $10 million or the sum of 2.5 times the average total monthly payroll costs for the prior year.
For these, a business also needs to have been in operation prior to 2/15/2020. Funds can be used to retain workers and maintain payroll, make mortgage payments, lease fees and utility payments.
Loan forgiveness is available if the loan funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll).
SBA’s Economic Injury Disaster Loans
The SBA’s Economic Injury Disaster Loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact, and will carry an interest rate of 3.75% for small businesses.Apply through the Small Business Administration for these 30 Year terms, $10,000 loan advance. The SBA loan programs applies to businesses with less than 500 employees.
With these loans, small business may not be required to pay back the loan, provide collateral pledges, or provide personal guarantees for the funding. The CARES Act also waives the requirement that it cannot obtain credit elsewhere.
Payments of principal, interest, and fees will be deferred for at least 6 months, but not more than 1 year. Interest rates are capped at 4%. The SBA will not collect any yearly or guarantee fees for the loan, and all prepayment penalties are waived.
The SBA has no recourse against any borrower for non-payment of the loan, except where the borrower has used the loan proceeds for a non-allowable purpose.
Self-Directed IRA LLC and Solo 401(k) Impact
A Self-Directed IRA LLC or Solo 401(k) plan will likely not be eligible for SBA relief. Although an LLC has been formed, these entities do not meet the criteria of the SBA’s loan requirements. We’ve had many questions from clients who think just because an LLC was formed with their IRA, that they qualify as a business for these loans. The same is true for Solo 401(k) users. Yes, you may have a business entity, but essentially, you need employees to qualify as a “small business” for the SBA loans.
If you do own a small business outside of your plan, you may be eligible for an SBA loan. It is certainly worth looking into it for yourself. Act fast, since there is only so much money to go around.
For other ways to make it through this crisis financially, check out our YouTube page. IRA Financial president, Adam Bergman, is hard at work creating easy-to-understand videos. These videos are short and to the point and explain all the available options for retirement account holders.