Many businesses are struggling to navigate their way through the current Coronavirus pandemic. Some have been forced to shut down. Others are still in operation but have had to send their employees home. Most have seen orders drop off, revenues decline and profits disappear. We all know that the pandemic isn’t going to last forever. But as I write this in April 2020, we also know that things could continue this way for the next few weeks, if not months, which is why building and maintaining cash is so important.
That’s because businesses with enough cash will survive this, like all other economic downturns.¬† There are many strategies that you can employ to increase your cash flow, but the most popular right now is seeking help from the federal government. With new funding underway from Congress, this avenue is more important than ever. Are you getting federal relief? You should, and it can come from these three places.
Economic Injury Disaster Loans
The Economic Injury Disaster Loan program has been in effect for years and has been used to help small businesses hit by disasters – hurricanes, floods, etc. – get needed funding directly from the Small Business Administration in the form of long-term, low-cost loans. The program was expanded to now include all small businesses – those with less than 500 employees – in every state which have been impacted by the Coronavirus pandemic. These are straight loans that are issued directly by the SBA. Eligible businesses can borrow up to $2 million and pay back over 30 years at a 3.75 percent interest rate (2.75 percent for non-profits). There are also advances (that can be turned into grants) available up to $10,000 based on the number of full time employees you have in your company and bigger advances ($25,000) if you’ve done business with the SBA before.
Your Action: Pursue these loans. They’re open for any business of any size, even independent contractors and sole proprietors. If you qualify, they’re an excellent source of low-cost, long-term financing. If you find you don’t need the loans anymore, in a few years you can pay them back earlier without penalty. More information can be found here.
Paycheck Protection Program
Soon to be flush with cash, this program was launched under the CARES act to help stimulate the economy in the wake of the Coronavirus pandemic. The program allows any small business owner with up to 500 employees – even contractors, freelancers and sole proprietors – to borrow up to $10 million from a federally insured financial lender and then use that amount to pay for their payroll and other operating expenses. The loan amount is calculated using a formula based on the company’s payroll and other benefits. The unique thing about this program is that after an eight-week period, business owners are allowed to go back to their lender and apply for forgiveness of payroll and a portion of their rent, utilities, and mortgage interest. There are some restrictions, such as the amount of payroll that’s eligible for forgiveness and rules concerning ownership and affiliation. Any amounts not forgiven will remain outstanding for up to two years at a one percent annual interest rate.
Your Action: It’s not often that the government offers to literally fund your payroll and rent for a two month period, so if your business has been affected by the COVID-19 virus, strongly consider applying for a Paycheck Protection loan with a financial institution or online lender while funding is still available. You can receive it in addition to the Economic Injury Disaster Loan as long as you don’t use the proceeds for the same purpose. More information can be obtained directly from the Department of the Treasury.
Payroll Tax Credits and Deferrals
Another way to get cash – or better yet save cash – is through new tax credit and deferral opportunities. The CARES Act now allows employers affected by COVID-19 to defer their payroll taxes owed from the first quarter through the end of the year to 2021 and 2022. In addition to deferrals, there is now the Employee Retention Tax Credit which is available to any employer who does not participate in the Paycheck Protection Program and has been affected by the COVID-19 virus (either shut down or saw a revenue decrease of more than fifty percent compared to the corresponding prior period). This tax credit can be as much as $5,000 per employee per quarter and can be claimed on an employer’s quarterly federal tax returns. If you time things right, you can avoid paying federal employer taxes that quarter too.
Your Action: If you’re not participating in the Paycheck Protection Program, you should take advantage of these tax credits and deferrals. Talk to your payroll company or your accountant. Doing so will save a lot of cash, and right now, you need it. More information on payroll tax deferrals is here. More on the Employee Retention Tax Credit is here.
Extending Cash on Hand
While the government is doing all it can with these programs, the wave of businesses wanting to participate is hampering the response. While you wait for funds to come through, it’s essential to do all you can to extend your current cash reserves. As I said at the beginning—businesses with cash will survive this. Pay for as much as you can now on credit. Holding on to those cash reserves is much more important that any short-term interest you may get charged.
Your Action: Put everything on a credit card. If there are bills that you can’t pay with a credit card (rent, taxes, etc.), sign up for a service like Plastiq, which lets you pay for anything via card—whether or not your supplier accepts credit cards. They’re a smart way to make your cash go even further.
Yes, you need the cash. We don’t know how long the quarantines, shutdowns, and shelter-in-place rules will last. We don’t know when there will be a vaccine. We don’t know if we’ll be forced back to our homes in the fall. Which is why it’s so important to build up as many cash reserves as possible to help us weather this situation. Good luck.