In the past month, the federal government has responded to COVID-19 with three different aid packages. The most recent package, the Coronavirus Aid Relief and Economic Security Act (CARES Act) offers the biggest relief for Americans with roughly $2 trillion in funds.
Title & escrow businesses who currently face market uncertainty in the months ahead can find some stability by taking advantage of the various funds included in the CARES Act. Qualia recently sponsored two CARES Act webinars hosted by ALTA and October Research.
In ALTA’s webinar titled “How Your Business Can Access Financial Assistance Due to COVID-19 Pandemic” ALTA’s Senior Counsel, Steve Gottheim provided details on how businesses can determine their eligibility and apply for current federal assistance programs.
In October Research’s webinar titled “CARES Act for You” Qualia’s Controller, Jeff Roest, joined Jacqueline Brooks, Partner at Saul Ewing Arnstein & Lehr and Tommy Lee, Partner-in-Charge of SBA Services at Aprio to discuss the CARES Act and its applicability to the title industry.
Paycheck Protection Program (PPP)
According to Gottheim and Brooks, the most beneficial package for title & escrow businesses is the payroll protection program (PPP). This program provides businesses with under 500 employees (or less than $12 million in revenue) funds to help cover costs such as:
- Payroll costs (salary, wages, commissions, cash tips, sick leave, vacation, health insurance, retirement contributions, severance payments, state and local taxes assessed on compensation)
- Note: payments to independent contractors cannot be included as these individuals can apply for their own PPP loan
- Rent on leases incurred before February 15, 2020
- Mortgage interest or other debt interest on loans before February 15, 2020
ALTA’s data indicates that 97% of title & escrow businesses employ less than 500 employees, making this a powerful program for the vast majority of title & escrow businesses facing economic uncertainty after the COVID-19 outbreak.
Under the PPP businesses are eligible for loan amounts equal to 250% of their monthly payroll expenses from the past 12 months (up to $10 million and no more than $8.333 per employee per month). Loan amounts used to cover payroll expenses during the 8-week period after disbursement will be forgiven if the business retains its employees at their salary levels. Note: no more than 25% of loan forgiveness amount may be attributable to non-payroll costs.
If a business does not use the PPP loan amount for “forgivable” expenses, the loan takes a 1% interest rate and 2 year loan maturity. These are excellent terms that Gottheim noted will benefit businesses regardless of the loan forgiveness. “Even if you have to repay this loan, this is going to be one of the cheapest business loans you’ll ever have,” Gottheim said.
Eligibility for PPP
“One of the unique features of the PPP is that there are not many lending criterias involved,” Gottheim noted. The main criteria are as follows:
- Must be a business
- Must operate in the United States
- Must have been in business before February 15, 2020
- Must have less than 500 employees OR less than $12 million in revenue (Brooks added that businesses with NAICS Code beginning with 72 [i.e. hotels] that have multiple locations but fewer than 500 employes per location are eligible)
How to apply for PPP
The application process comprises two parts: find a lender and complete the PPP application. Once the application is completed, the lender does not need to verify the information other than confirming full documentation to support the application and proper calculations for the loan amount.
Find an SBA approved lender. Gotham and Brooks recommended that businesses use their existing bank where possible. “Lots of banks are focusing on their current clients which is why we recommend you go with your current bank.” Brooks said. Gottheim also noted that your current lender will be able to process your loan faster because they have already conducted customer due diligence. If your current bank is not an SBA lender, you can leverage SBA’s lender match tool to find a lender; however, Gottheim recommends that you ask your lender if they plan to become an SBA lender soon as many lenders are joining SBA daily.
Complete the application. Gottheim recommends that businesses collect information and documentation upfront to avoid back-and-forth with the lender. “The more information you can provide upfront the faster you’ll receive your loan amount,” Gottheim said. This documentation includes any information that validates your operations and eligibility for the loan including:
- Payroll processor records
- Payroll tax filings
- Any form 1099-MISC supporting contractor pay (for contractors)
- Income and expenses from a sole proprietorship (for sole proprietors)
Challenges with accessing PPP
Gottheim noted that due to the demand for PPP loans and the “unprecedented volume” SBA lenders are now facing businesses should be prepared for some hiccups in the process.
According to Gottheim, SBA banks collectively issued 60,000 loans in one year prior to COVID-19. In contrast within the first three days of the CARES Act just one SBA bank alone accepted 150,000 applications. “It’s important to remember that your bankers are learning this at the same time you’re learning this,” Gottheim said.
Economic Injury Disaster Loan (EIDL)
If the PPP loan option is not leveraged, businesses can use the Economic Injury Disaster Loan (EIDL) program for financial relief. This loan program originally provided financial assistance to businesses located in disaster zones.
According to Gottheim and Brooks, the loan terms for the PPP loan are significantly better than the EIDL program. The loan is not forgivable and the maximum amount you can borrow with the EIDL program is $2 million. The loan also carries higher interest rates than the PPP loan option (3.75% for businesses and 2.75% for nonprofits).
“While the EIDL program is available to you in almost all instances it’s going to be better to apply for the PPP loan,” Gottheim noted. “The one instance where it’s a little bit better to complete an EIDL application is if you need money quickly.” The EIDL program offers a $10,000 emergency grant that businesses can receive within three days of application. There is no obligation to repay the grant or have an approved EIDL loan to receive these emergency funds.
Eligibility for EIDL
Brooks provided a few bullet points for EIDL eligibility including:
- Businesses with 500 or fewer employees
- Cooperatives, ESOPs and tribal businesses with 500 or fewer employees
- Sole proprietors and independent contractors
- Most private nonprofit organizations
- Must have been in business prior to January 31, 2020
- Must have suffered substantial economic losses by disaster
- SBA affiliation rules apply
Payroll Tax Deferral
“If you don’t apply or qualify for a PPP loan, the second best federal aid is the payroll tax deferral option,” Gottheim noted. Under this program employers of any size can defer paying their portion of the Social Security payroll tax (6.2% tax) and pay it back over two installments in the coming two years. At least half must be repaid by December 31, 2021 and any remainder must be paid by December 31, 2022.
Gottheim noted that businesses that receive a PPP loan are not eligible for the Payroll Tax Deferral program.
Employee Retention Tax Credits
If you are retaining employees on your payroll, and especially if your business has been financially impacted by COVID-19, you’re able to claim a refundable tax credit for up to 50% of the first $10,000 in wages you pay to employees. “If you’re seeing a significant drop in your revenue throughout the year, talk to your accountant about your eligibility for this tax credit,” Gottheim recommended.
Exchange Stabilization Fund
The final program discussed in ALTA’s webinar was the exchange stabilization fund program. This is the $454 billion the treasury controls that has been given to the federal reserve so they can support businesses with up to $4 trillion in loans.
“If you are a business that has relied on traditional types of commercial financing such as the commercial paper market, know that this money is out there to pump more liquidity into those markets,” Gottheim said. “Hopefully this [fund] will make those loans easier to flow to your business,” Gottheim said.
Building a plan to use CARES Act funds
The October Research webinar included insights from Aprio, a CPA advisory firm, on how to properly manage and plan the use of CARES Act funds.
“One of the things we start with is making sure everyone realizes this is debt,” Lee said. He noted that while the PPP offers loan forgiveness, businesses may have changing circumstances within the 8 week period after the loan is granted which can cause them to become ineligible for loan forgiveness. For example, if a business needs to let go of employees during the 8-week period, they would no longer be eligible for loan forgiveness.
Lee recommends that businesses go over a 13 week cash flow projection whereby the business outlines liquidity balances (cash, money that is available via lines of credit), the costs that the business will accrue over the next 13 weeks, and when the business believes it will be back online.
Lee noted that this quantitative plan is important; however, it’s equally important to have a qualitative plan in place as well. “For example if you’re going to hire half of your workforce back you’ll also have to have a qualitative plan such as what this rehiring means for HR.”
Lee also noted the importance of planning out the use of EIDL and PPP funds. “It’s very important that you’re specific in your use,” Lee said. “We suggest that you put those funds into a separate bank account to ensure you’re ready in case there is some form of reconciliation or audit.”
For more information on how to maintain business continuity during COVID-19, click here to access our coronavirus resource page.