CARES Act Bolsters Businesses

By Generational Group

04/06/2020

Dear Insight subscribers,

Amidst the macroeconomic challenges given the COVID-19 pandemic, we have some positive news to report. Based on the recent legislation passed by Congress and signed by the President, there is significant relief from the current economic toll of the Coronavirus for business owners and their employees. Many readers may already be familiar with this legislation, but we wanted to give you a summary of how you might benefit from the bill.  

The U.S. Federal Government has made unprecedented strides to help business owners with some immediate relief, most notably through a $2 trillion CARES Act stimulus package that includes the Paycheck Protection Program (PPP) designed to provide funds in quick order to help small businesses retain and pay their current employees. The U.S. Chamber of Commerce has created a very good overview of what the program entails. We encourage you to download a copy here:

• Coronavirus Emergency Loans Small Business Guide and Checklist

Some of the highlights include:

Who Is Eligible?

• A small business with fewer than 500 employees
• A small business that otherwise meets the SBA’s size standard
• A 501(c)(3) with fewer than 500 employees
• An individual who operates as a sole proprietor
• An individual who operates as an independent contractor
• An individual who is self-employed who regularly carries on any trade or business
• A Tribal business concern that meets the SBA size standard
• A 501(c)(19) Veterans Organization that meets the SBA size standard

What Will Lenders Require?

In evaluating eligibility, lenders are directed to consider whether the borrower was in operation before February 15, 2020 and had employees for whom they paid salaries and payroll taxes. Certain lenders may have additional documentation requirements, so you should consider collecting your financials, payroll records, and tax returns ready to share with the lender.

What Lenders Will NOT Require

• That the borrower sought and was unable to obtain credit elsewhere 
• A personal guarantee  
• Collateral for the loan

How Much Will You be Able to Borrow?

Loans can be up to 2.5x the borrower’s average monthly payroll costs, not to exceed $10 million. Some exclusions do apply to the calculation of payroll costs, so be sure to review the legislation closely with your tax or other trusted advisor.

The great news is that a borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan:

• Payroll costs (using the same definition of payroll costs used to determine loan eligibility)
• Interest on the mortgage obligation incurred in the ordinary course of business
• Rent on a leasing agreement
• Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
• For borrowers with tipped employees, additional wages paid to those employees

However, Treasury guidance states that a borrower can only use up to 25% of the borrowed funds on something other than payroll if they want the amount forgiven.

There are exclusions to the loan forgiveness and specific limitations on how the borrowed funds may be used. We recommend that you consult with your tax advisor, and accountant, or other trusted advisor for full information on the PPP.

What Does This Mean For You?

We believe that this significant legislation will be critical in helping U.S. companies remain in business and prepare them and their associates for an eventual full recovery.   

Overall, corporate balance sheets are strong, interest rates are very low, and capital is available for both business growth and acquisitions. Most importantly, the banking system is extremely stable and reserves are well above Federal guidelines.

From an M&A cycle perspective, while the markets are turbulent, we are still seeing significant buyer interest and we expect deal closings to ramp up rapidly once recovery begins.

In fact, we believe many business owners should be looking at this economic uncertainty as an opportunity to get their businesses ready for the pending M&A upswing by starting the exit planning process.    

If you would like to learn more about how we can help you to build value in your business, and plan for your eventual exit, please call us at 972-232-1121 or visit our website, provide us with your contact information, and we will be in touch.

We wish you, your business, and your loved ones' safety and good health during this time. In the midst of challenges there are always blessings and opportunities. This situation is no different. History shows us that this too shall pass, and that when it does, we will emerge stronger than before.

Your Generational Team

DISCLAIMER: This information is provided as a courtesy to assist in your understanding of the impact of certain regulatory requirements and should not be construed as tax or legal advice. Such information is by nature subject to revision and may not be the most current information available. Generational encourages readers to consult with appropriate legal and/or tax advisor.