Businesses across the country have had to lay off workers to deal with sudden cash flow crunches which, in turn, limits what those businesses can do in this time.
On March 27, the White House signed HR 748/the “CARES” Act into law, providing $2 trillion of aid to many Americans, small businesses, hospitals, and some struggling industries. The bill significantly boosts unemployment benefits, but it also provides real help for small businesses.
If you’re a small business owner that is dealing with the economic fallout from the coronavirus, read on. Here, we’ve compiled some tips to navigate a crisis and help you take advantage of the coronavirus stimulus bill.
Start Cutting Costs
The unfortunate reality of coronavirus is that most small businesses will likely have to lay off (or already have laid off) employees. The “CARES” Act reduces the gut punch as unemployment benefits have improved, but no small business owner enjoys laying off employees.
If you haven’t laid anyone off yet, it’s imperative to start cutting costs as much as possible to avoid that outcome. To do so, start breaking down your fixed and variable costs.
Fixed costs are ones that recur in the same amount regularly. Things like equipment leases, software subscriptions, and rent are common fixed costs. Take a look at these expenses and see what you can cut.
If everyone is working from home anyways, consider terminating your office lease, internet, and phone service if it isn’t too costly to do so. Also, many local governments have instituted a temporary eviction ban on commercial businesses so if you operate a brick-and-mortar store, see if you’re eligible for any rent relief.
Cutting down on your fixed costs will help you adjust your variable costs accordingly. Variable costs are ones that change each pay period. For instance, paid spend on advertising and employee perks like free snacks and coffee are variable costs that you can nix immediately. Restaurants still open for takeout or delivery can nix any experimental menu item. Times of crisis are not ones to test new marketing initiatives or new products; they’re when to focus on what you know works.
Another tip: If you own any assets, like machinery or warehouse space that you don’t need quite as much during this time, consider leasing those assets out to generate some immediate recurring cash flow.
Don’t File Your Taxes Immediately
In addition to the stimulus bill, the federal government announced an extension of the income tax filing and payment deadlines to July 15, 2020. For small business owners, that means you can hold on to capital for three more months without accruing late fees or interest payments.
(One clarification here: If you’re paying estimated tax payments, payment for the second quarter of 2020 is still due June 15, while payment for the first quarter is due July 15.)
State deadlines will likely mirror federal deadlines, but this resource from AICPA can help you see your state’s deadlines as they update.
Additionally, the CARES Act includes a provision that allows businesses to get a tax credit against its 6.2% share of Social Security payroll taxes if they keep employees on their payroll during the pandemic. This is called the Employee Retention Credit and is another reason to start cutting non-payroll expenses as much as possible. The tax credit provides a refund to businesses for half of what they spent on wages, capped at $5,000 per worker.
Businesses must prove they took a 50% loss compared to the same quarter in years past to qualify. The tax credit also won’t be available if you take out any of the SBA loans specific to the coronavirus offered to small businesses.
Employers will also be allowed to defer payment of the 6.2% Social Security tax that would otherwise be due in December 2020 until December 31, 2021 and December 31, 2022. (50% each year.) Self-employed taxpayers may defer paying 50% of their self-employment tax until the end of 2021 and 2022 as well. (25% each year.)
If you haven’t filed your taxes, you may be able to receive immediate, significant relief. However, if you’ve already taken out certain loans, you may not qualify. Be sure to talk this through with your accountant to make sure delaying filing is the right option for you.
Explore Loan Options
As noted before, many of these tax benefits are not available if you have already received a loan. Likewise, if you already filed and paid your taxes, you may be feeling shorted. Fortunately, there are a number of loan options you may pursue to get cash now.
In mid-March, the Small Business Administration (SBA) made its disaster assistance loan program available to small businesses affected by the pandemic.
Through the coronavirus bill, an additional $10 billion will be allocated to these loans, called Economic Injury Disaster Loans (EIDLs). The bill also allows expanded eligibility for businesses suffering economic harm due to the coronavirus, and gives the SBA greater flexibility to disperse small dollar loans directly. Additionally, it allows businesses to apply for an emergency grant of $10,000, to help maintain payroll, provide sick leave, and manage debt obligations.
The interest rate on EIDLs is 3.75% for small businesses who do not have available credit elsewhere. For nonprofits, the interest rate is 2.75%. During the emergency loan period, rates will not exceed 4%.
Most of the small business funding from new federal legislation, however, will go to the Paycheck Protection Program (PPP).
The U.S. Senate Committee on Small Business and Entrepreneurship states: “The Paycheck Protection Program would provide eight weeks of cash flow assistance through 100% federally guaranteed loans to small employers who maintain their payroll during this emergency. If the employer maintains its payroll, then the portion of the loan used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven.” There’s yet another incentive to avoid layoffs. The emergency period that covers when these loans are available runs retroactively from February 15, 2020 to June, 2020.
Some other important details:
- Loan size will equal 250% of an employer’s average monthly payroll, with a maximum loan amount of $10 million.
- Fee waivers, automatic deferment of payments, and no prepayment penalties reduce the costs of participation.
- Unlike typical SBA 7(a) loans, there is no “credit elsewhere” test, and no personal guarantee, or collateral will be required.
- The amount of the loan that is forgiven may be reduced if the employer reduces its workforce (or salary or wages paid to their workforce) during the eight-week covered period. You can avoid that reduction by rehiring or increasing pay within a certain time period.
Emergency loans are available immediately through existing SBA-certified lenders, and the SBA will continue adding additional lenders to the program. We put together a list of the top 250 SBA approved lenders, check out that list here.
Each of these loans will be 100% guaranteed by the federal government through the end of 2020. At that point, loans over $150,000 will have a 75% guarantee. Loans under $150,000 will have an 85% guarantee.
Certain state governments and local municipalities have also instituted loan programs to help small businesses. For instance, in New York City, Mayor Bill de Blasio announced that the city would provide economic relief to small businesses in the form of:
- Zero-interest loans of up to $75,000 for small businesses with fewer than 100 employees who experienced a 25% revenue reduction.
- Grants for small businesses with fewer than five employees to cover 40% of payroll for two months.
It’s true that other local programs are likely not as significant as New York City’s but you should still contact your governor’s office, local Chamber of Commerce, and your local SBA office to see what financial help is currently or may soon be available locally.
Reach Out to Your Community
Finally, trust your existing community. Your customers want to support you – you just need to let them know how. Consider creating gift cards for your business to get cash now in exchange for goods or services later. You don’t have to have your brick-and-mortar store open to offer gift cards. Any business that has felt an economic hit from coronavirus can appeal to their existing client base to front-load business or pay now for services later.
If you haven’t already set up an online version of your business, do so. People are stuck inside with plenty of time to shop online.
Additionally, if you’re running low on cash to pay employees and you want to retain the tax and loan incentives, consider setting up a support fund for your customers to contribute to. Platforms like GoFundMe, Venmo, or PayPal make it easy to create an account explicitly for employees whose hours have been cut or you may be forced to furlough.
The support of your community and existing customer base may mean the difference between closing your doors and surviving through the crisis.
The coronavirus pandemic has had a major economic impact on businesses. Fortunately, there is help on the way from the federal government. Between local and federal programs to support small businesses and smart management, there is a way through this troubling time. This guide should help you make it through as best you can.