Hatch Fairhope, as the name suggests, is supposed to be a place where business is born. A joint venture of The University of Alabama, the city of Fairhope and the Baldwin Community and Economic Development Foundation, it opened in 2018 as an advanced technology incubator and resource hub, expecting over a five-year period to launch as many as 266 new and indirect jobs with an estimated payroll of $16.8 million and total sales/output revenue for Fairhope of $33.65 million, according to a news release from the time.
But after the COVID-19 pandemic effectively halted non-essential commerce across the state and nation, Hatch changed its focus. Today, its mission is keeping existing businesses from dying.
“Most people are pretty discouraged,” Hatch Director Rick Miller said Monday. “I’m hearing from a lot of service businesses — most of them are under-10-employee companies — that have just shut down. Nobody’s buying. Photography studios, small real estate firms and vacation rentals, restaurants, massage therapists…. In January most of them were looking forward to 2020, but then this came and nobody saw it coming.”
In addition to providing guidance about staff retention and federal loan programs, Miller has offered innovative ideas for business owners to consider while the economy is restricted. But at this point most have done the math, know their limits and remain just as uncertain as everyone about when restrictions will be lifted and what the economy will look like on the other side.
“What I’m seeing is most can probably go another month, maybe two months, but if people aren’t back to work sometime in May, I think a lot of these small businesses are not going to make it. Not because they weren’t good businesses, they just didn’t have the cash reserves to get them through. I think that’s the challenge right now and we’ll see how much and how quickly the stimulus can get to some of them.”
On March 27, President Donald Trump signed a $2 trillion economic stimulus package — the largest in the history of the nation — which, among other things, funded emergency aid programs for small businesses. Two of its primary programs are the U.S. Small Business Administration’s Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan program (EIDL).
There is also aid for employees, who are eligible for additional unemployment benefits, and payments of at least $1,200 to all taxpayers who can’t be claimed as dependents, with adjusted gross incomes of less than $75,000 (or $150,000 for married couples). But nearly two weeks after the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law, none of that aid has yet to trickle down.
Meanwhile, individual banks and lending institutions, who are charged with administering portions of the aid, have had difficulty handling the sheer number of applications, while the federal government has not provided a uniform calculation for how it will be distributed.
Last week, Mobile Area Chamber of Commerce Chairman Terry Harbin hosted a conference call to discuss the banking industry’s role in supporting local businesses with the EIDL and PPP. A market president at BancorpSouth, he noted they are “two very distinct programs,” but “it will surprise me if actual funding is made available before the middle of the month.”
“The volume of applications is so high … it is going to take some time to validate the applications, validate the supporting documents and do a screen for fraud. The application is only two pages long, but they are asking [banks] to make some determinations to make sure data is legitimate — the first checks will be 10-15 days after tomorrow.”
PAYCHECK PROTECTION PROGRAM (PPP)
The CARES Act’s largest single incentive for small businesses is the PPP, which received $349 billion in initial funding. Essentially, it’s available to any eligible business (many that have been deemed “non-essential”) with 500 or fewer employees and can provide forgivable loans of up to $10 million each.
The amount of the loan is equal to two months’ of a business’ average monthly payroll costs from the past year plus an additional 25 percent of that amount, subject to the $10 million cap.
If the loan proceeds are used to cover payroll costs, most mortgage interest, rent and utility costs over the eight-week period after the loan is made and employee and compensation levels are maintained, it is entirely forgivable and won’t have to be repaid.
Small Business Administration (SBA)-qualified banks are the lending institutions and the application period opened April 3. It closes June 30, but lenders encourage applicants to apply as quickly as possible, because the funding could be exhausted.
“The intent of the program is to cover payroll expenses for eight weeks,” said Heather Wright, a member of the Alabama Small Business Development Center’s (SBDC) Capital Access Team. SBDC hosted a series of webinars about economic relief programs over the past week and they are available to watch on demand at asbdc.org. “Demand is high, but we don’t believe there is any way $349 billion can be distributed in a day or even a few weeks … however, if funds run out at some point, we expect the program to be reauthorized.”
While applications can be submitted through most local banks (provided they are already partnered with the SBA), several large lenders such as Wells Fargo, Chase and Bank of America have either suspended or postponed their participation in the program. Bank participation may change daily, so Wright recommended checking with your lender, accountant, payroll company or consultant for your best course of action.
There is expanded eligibility for sole proprietorships, independent contractors, nonprofits and the self-employed, although federal guidance for those is expected to be released this week.
Only one loan may be obtained per company, and the PPP carries a fixed interest rate of 1 percent (it was initially 0.5 percent) and payments are deferred for six months with the loan due in two years. There is no collateral or personal guarantee requirement and again, “it can be 100 percent forgivable if you use it the right way,” Wright said.
“Think payroll, payroll, payroll,” Wright said, noting 75 percent of the loan must be used for the payroll in order for the loan to be forgiven. Payroll costs are salaries, wages, commissions or tips, capped at $100,000 on an annualized basis for each employee. Independent contractors may not be counted in the payroll calculation. Employee benefits and state and local taxes assessed on compensation is defined as a payroll cost and should be included in the calculation.
Twenty-five percent can be used for mortgage interest, rent or utilities.
Deductions may be made to the forgivable amount if there is a decrease in the full-time equivalent (FTE) employee headcount as compared to the prior year or if there is a decrease of more than 25 percent in salaries or wages for existing employees. Separately (see below) the forgivable amount will be reduced by $10,000 if the same business applied for and received a $10,000 advance from the EIDL program. Your lender will provide more information about loan forgiveness.
Documentation required includes, but is not limited to, 2019 IRS Quarterly 940, 941 or 944 payroll tax reports, a payroll report for the most recent 12-month period showing gross wages for each employee, paid time off for each employee, vacation pay for each employee, family medical leave pay for each employee and state and local taxes assessed on an employee’s compensation.
For independent contractors, lenders will need a copy of 2019 IRS 1099 forms.
Economic Injury Disaster Loan (EIDL)
SBDC team member Suzanne Darden said unlike the PPP, the EIDL program is administered by the SBA and is intended to provide working capital to small businesses, small agricultural cooperatives, small aquaculture businesses and most nonprofit organizations directly or indirectly affected by a declared disaster or harmed by losses in an impacted community. Banks can also help process the program.
The applicant must have a “tangible and significant physical presence” in the declared disaster area, Darden said, and must have a good credit history and must be able to repay the loan.
Available in amounts up to $2 million, the EIDL is not forgivable, but it does carry relatively low interest rates of 3.75 percent for small businesses and 2.75 percent for nonprofits. Terms extend as long as 30 years and there are no prepayment penalties.
The loans may be used to pay fixed debts, payroll, accounts payable and other bills “that could have been paid had the disaster not occurred.” The loans are not intended to replace lost sales or profits or for business expansion.
The application deadline is longer than that of the PPP and may be filled out online at SBA.gov through Dec. 21. Businesses can apply and receive both the PPP and EIDL, but the money must be used for separate purposes.
EIDL loans do require a personal guarantee if they are less than $200,000, but the SBA may take real estate as collateral if it is available; the agency will not deny a loan for lack of collateral.
At the end of the online application, there is also an option for a forgivable advance of “up to $10,000” which can be directly deposited into the applicant’s account within seven to 10 days of the application.
“It really is a straightforward process,” Darden said. “There is no cost to apply, and there is no obligation to take the loan if offered.”
As of last week, the SBDC had not received guidance on whether the $10,000 advance would have to be repaid if the EIDL was denied by either the SBA or the applicant.
Separately, the SBA also offers a program known as the Employee Retention Tax Credit, but it cannot be used in combination with the PPP. Smaller “bridge loans” of up to $25,000 are available from the SBA with different terms and conditions, but may be desirable for businesses who need a quick infusion of cash while waiting for EIDL or PPP applications to proceed.
UNEMPLOYMENT AND OTHER COMPENSATION
On Monday, Alabama Department of Labor (ADOL) Secretary Fitzgerald Washington announced that over the past week, the department paid more than $6 million in COVID-19-related unemployment compensation benefits.
While the latest unemployment statistics are expected to be released Thursday, in the three weeks since business restrictions were announced, the department experienced a 4,347 percent increase in filings for unemployment, from 1,819 the week of March 14 to 80,984 the week of March 28. The numbers are expected to rise.
“We have seen an overwhelming number of employees filing claims for unemployment compensation benefits,” Washington said in a statement, acknowledging the surge has led to some people having trouble with the application process.
The state provides a maximum of $275 per week in unemployment benefits for as long as four months, but the CARES Act infused states with a total of $250 billion in additional compensation, allowing the unemployed to receive an additional $600 weekly check for a term of as long as four months.
The ADOL advised claimants they will receive funds via a direct deposit, an existing debit card from a previous unemployment claim or via a new debit card. The first payment may take as many as 21 days to receive, “but should generally be received sooner.” The $600 federal supplement became available April 9, according to a news release.
While officials instituted more strict social distancing and stay-at-home guidelines in hopes the pandemic will not extend into the summer months, the financial damage may last months or years after it is over. In the meantime, Miller suggested supporting small businesses as much as possible.
“Many of them are closed, but if you have to go to a pharmacy, maybe go to a local pharmacy,” he said. “You don’t have to get groceries at Walmart or Winn-Dixie; consider a local company like Piggly Wiggly or Greer’s. If you’re thinking about going to Home Depot or Lowe’s, consider your local ACE Hardware.”
Some businesses are taking and delivering online orders, while others are providing curbside service, he said, and even if you can’t provide financial support, provide emotional support.
“We’re trying to tell people to be proactive, talk and just try to call somebody and see how they’re doing because misery loves company and sometimes just reaching out will make you feel better,” Miller said. “The banks are swamped right now and everything may take time, but we can support each other while we wait.”
OTHER RESOURCES:
Atlas Alabama, and initiative of the Alabama Small Business Commission, provides information related to SBA loans and assistance, unemployment claims, tax relief programs and more.
ALtogetheralabama.org is the state’s official guide to COVID-19 relief efforts and a hub of information for the state’s response to the coronavirus crisis.
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