COVID-19 Crisis and North Carolina Small Businesses: Top 10 Steps to Take Advantage of Emergency Financial Aid

Business owners in North Carolina are facing gut-wrenching decisions in the COVID-19 crisis: Can I afford to keep any of my workers on payroll? Can I make my rent payment this month?

Many small businesses in North Carolina need emergency financial relief now to stay afloat during the COVID-19 pandemic. 

I've found that small business owners are generally optimistic by nature. When given the opportunity to place a bet on their business, they will consider that wager to be a well-placed investment. The federal government is now offering emergency COVID-19 relief that allows small business owners to place those bets, often with little or no downside. Think forgivable loans with no personal guarantee or collateral obligations...

At Spengler Agans Bradley PLLC, we’ve read through hundreds of pages of federal emergency legislation and spoken with several Charlotte bankers. We've gathered the best practical information we can find.

Here are 10 steps you can take to maximize the emergency financial relief for your North Carolina small business:

1. Suspend existing payment obligations

At least for the time being, many lenders are sympathetic to borrowers and will barely ask questions before granting a COVID-19 forbearance request. A borrower should be able to secure a three- or six-month forbearance on mortgage payments and other debt obligations, without much hassle. It is important to reference COVID-19, specifically, in requesting a forbearance. The call centers for some large financial institutions have reportedly treated this as a “magic word” that must be spoken to open the gates to financial relief.

If you rent your commercial space, you may consider talking to your landlord about a forbearance and reviewing your options under your lease agreement. I recently wrote an article for NC Lawyer's Weekly that offers my take on how North Carolina courts may handle landlord-tenant disputes in the age of COVID-19.

2. Check for automatic relief on 504 Loans

Many small businesses who own their commercial properties received financing through the 504 loan program sponsored by the Small Business Administration (SBA). In 2018, our law firm worked with BEFCOR to apply for a 504 loan to buy our office in the Elizabeth neighborhood, which we wrote about here. Under the terms of the 504 loan, the borrower makes a down payment of 10 percent, a commercial lender loans 50 percent, and the SBA guarantees the remaining 40 percent.

For six months starting in April 2020, the federal government will automatically make mortgage payments on behalf of small businesses for the portion of the mortgage held by the SBA (the 40 percent piece). This relief from mortgage payments is one of many provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed into law on March 27. Your company’s budget for the next six months could see a nice reprieve if you have a qualifying SBA loan. 

"There’s just an understanding that small businesses are going to need some leniency to get through this. In 33 years of working with SBA, this is by far the worst time I’ve seen economically. But it’s also the time when there’s been the greatest respect for what businesses are going through, and the SBA is truly working with companies the best that they can.”

Elaine Fairman, executive director of BEFCOR, a non-profit economic development lender that works with the Small Business Administration (SBA) to assist small businesses in North Carolina.

3. Apply for an Economic Injury Disaster Loan (EIDL)

The federal government now offers low-interest EIDL loans directly through SBA on its website (www.sba.gov/disaster). These loans for working capital come with an interest rate of 3.75% for qualifying small businesses, with up to a 30-year term and an automatic one-year deferment. There is no personal guarantee on amounts up to $200,000. On paper, the EIDL program offers immediate financial relief for small businesses: if your business applies for an EIDL, you can request a $10,000 grant for working capital. By statute, the SBA is required to disburse this grant within three days of the EIDL application. (The grant does not need to be repaid even if the loan application is denied.)

Early reports show some delay in getting the EIDL program up and running at scale. The SBA does not typically loan directly to small businesses, except for in cases of declared natural disasters. And unlike a tornado or a hurricane, the COVID-19 pandemic has inflicted economic injury across the country. As Elaine Fairman of BEFCOR said, it’s the “disaster of all disasters." You should expect EIDL grant payments to be made outside the three-day period called for by the statute.

4. Apply for a Payroll Protection Program (PPP) Loan

The federal government has deputized an existing SBA loan program (for so-called Section 7A loans) to inject $349 billion in forgivable small business loans into the economy. During the COVID-19 crisis, you can apply through your commercial bank for a special type of forgivable Section 7A loan under the Payroll Protection Program (PPP). 

Applicants must certify that the current economic uncertainty surrounding COVID-19 makes the loan request necessary to support the ongoing operations of the business. Businesses who qualify may receive a maximum loan amount equal to 2.5 times the company’s average monthly payroll. The calculation includes the amounts paid as wages and benefits to employees, including small business owners (up to $100,000 in annual salary). The PPP loans do not cover profit distributions to owners or expenses on independent contractors (self-employed individuals can apply separately). 

The best part is that the loan is forgiven if used on qualifying payroll and other expenses in the eight-week period after the loan disbursement. The amount of the loan that is forgiven may be reduced if the business does not return payroll to pre-COVID-19 levels by June 30, or if more than 25% of the loan is used for non-payroll expenses (e.g., rent, mortgage interest, and utilities). Amounts to be repaid under the PPP are subject to a 1% interest rate and a two-year term. 

“I have never seen an SBA loan forgiven before the CARES Act. And I have never seen an SBA loan without a personal guarantee or collateral requirement before now.” 

Elaine Fairman, BEFCOR.

Demand for PPP loans has been sky-high since the program opened for applications on April 3. Both Wells Fargo and Bank of America have announced that they already have received applications exceeding their lending capacities, and Congress is considering the need to increase the available funding by an additional $200 billion or more.

You should not delay in applying for a PPP loan, if you believe your business qualifies. To prevent fraud, banks are required to know their customer, before processing PPP loan applications. In practice, this means you should apply for the PPP loan through the bank that normally services your business.

5. Explore other tax credits for payroll

If your company does not receive a PPP loan, you may be eligible for significant tax relief. The new federal legislation provides a refundable employee retention tax credit worth up to $5,000 per employee. To qualify, a business must either be ordered to partially or fully shut down, or experienced a 50 percent decline in quarterly revenues, year-over-year from 2019. Companies with fewer than 100 employees will receive a 50 percent tax credit on all wages paid to employees during the qualifying period, including payroll expenses for employees who remain active. In other words, the government will pay half of the wages for your employees who are continuing to perform productive work. This refundable tax credit could be valuable for restaurants and other businesses that are continuing to operate at minimal capacity during the pandemic. 

Companies who do not receive PPP loans are also eligible for a payroll tax deferment: half of all payroll taxes otherwise due in 2020 is not due until the end of 2021, and the remaining half is not due until the end of 2022.

6. Apply for a NC Rapid Recovery Loan

BEFCOR and other economic development lenders do not participate directly in the EIDL or PPP loans. But they do offer “rapid recovery” loans to North Carolina small businesses impacted by COVID-19. Qualifying small businesses can receive up to $50,000 at 5.5% interest, with a four-year term, and a six-month payment deferment. Your company can apply online at www.ncrapidrecovery.org, where you have the option to select BEFCOR as your referral source. The $15 million in existing funding for the Rapid Recovery loans comes from the Golden Leaf Fund. The program is seeking additional funding sources to continue providing relief to North Carolina small businesses. BEFCOR also provides small business lending fund (SBLF) loans up to $150,000 for North Carolina businesses in rural counties. (Interesting side point: both loan programs are financed by the Golden Leaf Fund, which was established as part of the settlement of tobacco litigation in the 1990s.) 

7. Explore tax credits for employees on sick or medical leave

The Families First Coronavirus Recovery Act (FFCRA) took effect on April 1 and requires that small businesses provide two weeks of paid leave to employees who are sick with COVID-19 (or subject to a quarantine order) or who must care for sick family members during COVID-19. The paid family leave provisions require up to 12 weeks of paid leave for employees who cannot work because they must take care of children who are unable to go to school or childcare because of COVID-19. The federal government will refund the entire amounts paid to employees on leave under the FFCRA, again in the form of refundable tax credits. The Treasury Department has provided guidance to advance these tax credits so they’re available on a quarterly basis. With North Carolina schools closed through at least May 15, your employees with school-aged children may be eligible for extended paid family leave--and your business may be able to cover that payroll expense with money from the federal government. (Read more about the new paid sick leave requirements here.)

8. Consider layoffs as a last resort

Furloughing or laying off workers may be unavoidable in a crisis of this magnitude. The CARES Act provides that employers who must lay off workers due to COVID-19 will not be charged for unemployment claims. In other words, your company will not have to pay increased rates for unemployment insurance (UI) because of COVID-19 layoffs. (Read more about unemployment considerations here.)

9. Talk to your CPA

A good CPA is your best friend (or second best friend, after a good lawyer). The CARES Act includes other tax relief, including, for example, the elimination of penalties for withdrawing from 401(k) retirement plans to weather the COVID-19 crisis. Your CPA can help make sure that you are maximizing the tax relief available to your small business, and to ensure that you receive tax refunds at the earliest possible date. Help your CPA and yourself by documenting and keeping good records.

10. Be aware of scams

The government assistance offered to small businesses comes without any processing fees, so any solicitation that asks for loan origination fees or other money should raise a red flag as a potential scam. The last thing your business needs in the midst of the COVID-19 crisis is another headache.

For additional information on the federal relief available to your small business, schedule a Zoom consultation with the business and employment lawyers at Spengler Agans Bradley.

A special thank you to Elaine Fairman of BEFCOR, Will Bishop of TowneBank, Brian MacDonnell of PNC Bank, and Kelly Love of Regions Bank for their time and insights.

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