CARES Act & SBA Disaster Loans – Important Information for Microgym Owners
1. Coronavirus Aid, Relief, and Economic Security (CARES) Act
The CARES Act is a $2 trillion economic stimulus package that was signed by President Trump on 03/27/2020 just a few hours after approved by the House of Representatives. This Act is the largest in U.S. history and includes financial relief for individuals, employees and businesses.
The component of the Act that we have outlined below pertains to the Small Business Interruption Loans, also known as “paycheck protection program”, that many boutique fitness businesses will qualify for. The purpose of this program is to help small business owners continue to pay for operational costs due to the impact of COVID-19.
-Businesses with 500 employees or fewer can qualify, including sole proprietorships.
-$350 billion dollars allocated for the Small Business Interruption Loan program to be federally backed by the Small Business Administration under the 7(a) Loan Program during the covered period of 02/15/2020 through 06/30/2020. The SBA estimates that the program will be in place and application available by 04/03/2020. The list of Lenders has not yet been released as of 03/27/2020.
-The amount your business can qualify for is your average monthly payroll costs calculated using the 12 months prior to the loan origination date multiplied by 2.5. For businesses that were not in existence for the entire 12 months prior, upon request, you can average the total monthly payroll for 01/01/2020 through 02/29/2020.
Your payroll costs will be the sum of the following:
• Payment for services to employees including commissions and tips
• Payment for paid time off including sick leave, family/parental leave and vacation time
• Payment for health care benefits
• Payment of local and state employee compensation tax
The following need to be excluded when calculating your payroll costs:
• Payment for federal payroll taxes
• Compensation to any individual employee that has a salary of $100,000+
• Payment to employees whose principal place of residence is outside of the United States
For Example: Christie owns MicroGym XYZ and wants to calculate the maximum loan she can qualify for under this program. Between March 2019 – February 2020, she paid a total of $120,000 in qualified payroll expenses which equates to a $10,000/month average payroll. She multiplies the average monthly payroll by 2.5 to determine the loan amount of $25,000.
-The loans can have a term length of up to 10 years and an estimated 4% interest rate.
– There is the possibility for a deferment of repayment for 6-12 months.
– There will be no collateral requirements or personal guarantees by the business owner (unless funds are misused inappropriately).
– The proceeds of the loan can be used for:
• Qualified payroll and salary expenses
• Health insurance benefits
• Facility rent or mortgage interest
• Interest paid on debt obligations
– The CARES act includes a provision that would permit partial debt forgiveness for those who qualify and can provide supporting documentation of payments made. The amount that can be forgiven (not to exceed the original loan amount) would be the amount the business owner paid during the 8-week period following the loan origination for the following expenses:
• Facility rent or mortgage interest
• Qualified payroll expenses
Once you have calculated how much debt forgiveness your business could qualify for, it would then be directly reduced by (1) the number of full-time equivalent employees you have reduced and (2) any employees whose pay was reduced by more than 25%.
For Example: Christie has a monthly rent obligation of $5,000. She continued to pay rent as scheduled so during the eight week period paid $10,000 to her Landlord. She paid $500 total in utilities and with a reduction in payroll, had $8,900 in payroll expenses. The total of the expenses that can be forgiven is $19,400. From the original $25,000 loan, this calculation indicates she would only be obligated to repay $5,600. This is called the “paycheck protection loan” for a reason, so now we must take into consideration her reduction in payroll. Christie has:
• 2 full-time employees amounting to $4,000/each in payroll expenses per month ($8,000 total)
• 4 part-time employees amounting to $500/each in payroll expenses per month ($2,000 total)
Reduction Example Part 1 – The reduction formula for fewer employees is:
• The average number of full-time equivalent employees during the period DIVIDED by the average number of full-time equivalent employees during the time period of 02/15/2019 – 06/30/2019 OR 01/01/2020 – 02/29/2020 (at the election of the borrower) MULTIPLIED by the maximum available forgiveness amount.
• Christie typically has 2 full-time equivalent employees, but had to lay one off as a result. The calculation is 1/2 = 0.5 x $19,400 = $9,700.00 which is the new amount of debt forgiveness.
Reduction Example Part 2 – The reduction formula for employees whose pay is reduced by more than 25% (excludes employees making $100,000+/year) is:
• A straight reduction in the amount of any reduction of salary and wages over 25% that the employee received during the period as compared to the employee’s most recent full quarter of employment.
• Christie had to lay off 3 of her 4 part-time employees. Over the 8 week period, that amounted to a reduction in payroll of $500/month x 2 months (8 weeks) x 3 part-time employees = $3,000. Her fourth part-time employee is receiving a reduced wage of $450/month, but since the reduction of only $50/month is less than a 25% reduction, this reduction is not considered. The new calculation for the final debt forgiveness amount would be $9,700- $3,000 = $6,700 of debt forgiveness. Instead of repaying a loan of $25,000, she will now be responsible for repaying a loan of $18,300.
– There will be relief in place for those employers who are able to rehire the previous number of full-time equivalent employees by 06/30/2020 and/or increase payroll by the end of the period to offset any reduction that originally impacted the debt forgiveness amount.
2. Small Business Administration Economic Injury Disaster Loan (EIDL) Program
The purpose of this loan program provided directly by the U.S. Treasury is to help businesses affected by various types of disasters. Currently, every state and U.S. territory is considered a “disaster area” as a result of COVID-19. Therefore, any small business that is suffering economic hardship as a result of the virus can apply for this working capital loan.
The purpose of the loan is not to invest in expansion and growth, but is instead solely for a business to meet its ongoing financial obligations that currently cannot be serviced as a direct result of the disaster. During the application process, the SBA will confirm that had the disaster not occurred, the business was in a financial position to fulfill the expense obligations for which the loan is now needed. In addition to determining the amount of your business’ economic injury, the SBA will also evaluate personal financials and the ability of the business to repay the loan when determining the loan amount.
– The current EIDL loan summary is as follows:
• The loan has a fixed interest rate of 3.75%
• Loans up to $2 million
• Term up to 30 years
• Personal guarantee required
• Collateral not required for loans under $25,000
• Your business will not qualify for this loan if the business (or its principals) have access to other sources of credit that would sufficiently support the business through the financial hardship.
Key Changes to EIDL program as a result of the CARES Act include:
– Waivers to certain rules under the current SBA EIDL program will greatly increase the number of businesses that could qualify. The CARES Act allows the following requirements to be waived:
• The minimum 1 year in business prior to the disaster requirement
• Personal guarantees on loans of $200,000 or less
• The requirement that the applicant be unable to find credit elsewhere
– The CARES Act also permits that the approval decisions can be based solely on credit scores without the need for supporting financial documentation. In addition, via an emergency grant, entities that are applying for the loan may receive up $10,000 for urgent business expenses within 3 business days of applying. These funds do not need to be repaid, even if the borrower’s request for the loan is denied. If your business receives the advance AND is approved for the Paycheck Protection Program loan, the advance will be subtracted from the amount forgiven for that loan.
– The loan application can be found on the SBA website (we recommend using non-business hours to apply – ie. late late late at night – to avoid problems with the website being overrun)