3 Small Business Financing Alternatives to the Paycheck Protection Program
As the United States has scrambled to address the economic fallout from the COVID-19 pandemic, many business owners and their employees are left confused and frustrated by the response so far. The federal programs created to provide capital to the businesses that are struggling due to lockdown have received widespread criticism.
The Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) are the most sought out relief programs, but there is widespread confusion and criticisms of which companies are getting the loans, alongside funding issues. Even the companies that have already claimed EIDL or PPP loans are already looking ahead for other sources of capital to keep their businesses running.
But what is reasonably out there and available for small and medium-sized businesses that some business owners might simply just not know about? There are several options—with some designed specifically for COVID-19 relief, and others that have been around for a while which may be uniquely accessible now.
Main Street Lending Program
The Main Street Lending Program (MSLP) is an attempt by the Federal Reserve to infuse capital directly to distressed businesses.
The total funds allocated by the CARES Act is up to $600 billion. Where the PPP loans, administered by the Small Business Administration, were only eligible to small businesses with less than 500 employees, the MSLP is open to businesses with either 15,000 employees or less; or businesses that had less than $5 billion in revenue for 2019.
The loans can be issued by Eligible Lenders as long as they have the following features:
- Minimum loan size of $500,000
- Maximum loan size is lesser of $25 million or an amount when added to borrower’s existing outstanding debt, does not exceed four times borrowers 2019 EBITDA
- 4 year maturity
- Deferred principal and interest for one year
- Adjustable interest rate of 1 month or 3 month LIBOR + 300 basis points
- Is not a subordinate loan at origination
- Prepayment permitted without penalty
As of this writing, with current LIBOR rates, interest rates for MSLP loans would be under 4%. There are also some caveats to note.
First, borrowers must certify that they can meet their financial obligations and not declare bankruptcy in the next 90 days. Borrowers must also make “commercially reasonable” efforts to maintain payroll and retain employees during the loan period.
Employee Retention Credit
An overlooked provision of the CARES Act is the Employee Retention Credit (ERC). The ERC allows employers to claim a fully refundable tax credit that is equal to up to 50% of qualified wages paid to employees, up to $5,000 per employee per quarter. This credit is applicable to all qualified wages paid between March 12, 2020 and January 1, 2021.
Unlike the PPP, there are no company size or revenue limitations for companies to claim, as long as the business has had to suspend operations due to governmental COVID-19 restrictions or if the company has faced significant decline in gross receipts. A significant decline would mean the employer’s gross receipts in a quarter in 2020 were less than 50% for the same calendar quarter in 2019.
There is a strong reason why ERC has not received much attention–that if a business owner claims PPP, they cannot also claim the Employee Retention Credit. The advantages, however, are that the ERC is not a loan that needs to be paid back, and there are no associated funding issues like what PPP and EIDL have faced.
R&D Tax Credit
In 1983, after successive recessions, Congress introduced an unemployment fighting measure for the automotive industry called the R&D Tax Credit. The recessions of the early 1980s caused mass layoffs in the automotive industry, with unemployment hitting a whopping 24% in that industry compared to the overall peak unemployment rate of 10.8%. The R&D credit is a payroll credit that was designed to bring technical jobs back to the industry, and by the end of 1984, employment for the sector had rebounded dramatically with unemployment in the 6% range.
This success has led to the R&D credit being viewed by Congress as an effective job saving tool, and Congress throughout the years has continually reprogrammed and tweaked the credit to extend beyond automotive. Today, the R&D credit is now applicable to a wide range of industries from software and tech to agriculture. To qualify, a company simply needs to be able to show development or design of a new product or process, or the enhancement of an existing product or process, that is new to their individual business.
For example: If a software company creates a new program, or if a manufacturing company increases its efficiency by introducing new machinery, or if a farmer experiments with a new type of feed with his livestock to increase yield, they could all claim the benefit of the R&D credit.
What makes it particularly appealing now is that the IRS allows for a three-year lookback period–so any work a business has done since 2017 might qualify for a healthy tax credit at their next filing–which may be the type of liquidity that could make or break a business.