The CARES Act and Thriving During a Downturn

By the time the U.S. economy reopens weeks from now, tens of millions of people will have lost their jobs and thousands of small businesses will remain shuttered on account of the COVID-19 outbreak.  Estimates of the economic impact differ widely and it’s very likely that the ultimate financial cost of the coronavirus will take months if not years to fully understand. 

As we pointed out in our report last week, Congress has stepped up to support ailing households and businesses in an effort to mitigate some of the real financial pain being experienced today by real people.  But what sort of help is on offer and what can people do to weather the financial storm?

We believe that people can still thrive financially during this economic downturn by understanding the resources available to them and by taking solid steps today to set themselves up for a rebound for when the economy eventually recovers.  So, what sort of help can people get today?  Let’s begin by taking a look at the resources available to small business owners.

Small Business Resources from the Government

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was passed by Congress last month and is central to small business financial relief efforts currently underway.  This Act sets aside $350 billion in support through the Paycheck Protection Program (PPP) which offers forgivable loans to small business owners.  How does it work?

Well, if you have a business with less than 500 employees, you can apply for a loan to cover 8 weeks-worth of payroll and other things like mortgage interest, rent and utilities.  Sole proprietors, freelancers and independent contractors are also eligible to participate, but payroll is capped at a $100,000 annual rate. 

Figure 1: CARES Act - Support for Small Business Owners

Source: Broadview Macro Research

The loan covers up to 2.5 times monthly payroll (at last year’s levels plus 25%) and up to $10 million for all eligible expenses.  Not only is the loan forgivable, it does not require a personal loan guarantee.  Sounds great, right, what’s the catch? Well, there are a couple of things to consider. 

First, the government itself is not issuing the loans, so small business owners will need to initiate the process by reaching out to their local bank or SBA lender.  While some banks have been slow to get started with the program, more are coming online everyday which eases the burden of applying for a PPP loan. 

The other thing to consider is the requirements for loan forgivability.  Why is the government calling it forgiveness, when businesses need to take out a loan in the first place?  When the law was being drafted, members of Congress were concerned that business owners would just take the cash to keep their businesses afloat without consideration for their employees’ wellbeing. 

Figure 2: Payment Protection Program - Loan Forgiveness

Source: Broadview Macro Research

From this perspective, what the loan does is it incentivizes businesses to keep their workers employed, or bring them back to work, during this economic downturn.  More specifically, in order for the PPP loan to be forgiven, two key criteria must be met:

  • Employee headcount and compensation levels must be maintained over an 8-week period and at a level no less than 75% of last year’s rates and;
  • Loan proceeds should be used to cover payroll costs, mortgage interest or rent, utilities and in some cases allowances for employee separations, payments for health care and retirement benefits and state and local taxes

What this means is that debt forgiveness will be reduced as employers cut headcount or payroll falls by more than the 25% threshold.  Using the money for something other than what is outlined in the loan forgiveness criteria, like an owner paying themselves above and beyond the 25% limit, will put the business owner on the hook for part or all of the PPP loan.  So that’s the Paycheck Protection Program in a nutshell.  What if you’re a startup or otherwise don’t qualify for a PPP loan? 

Other Small Business Resources

The good news is that you still have a few options.  For instance, the Federal Reserve earlier this week announced its Main Street Lending Program.  The program makes available $600 billion in loans to small and medium sized businesses with fewer than 10,000 employees and with revenues of less than $2.5 billion.  You’ll need to talk to your bank to apply for this program and qualification and terms will follow the those laid out for PPP loans.   While the loan is not forgivable, the program offers a lifeline to businesses in the form of a 4-year loan, with principal and interest payments deferred for the first full year. 

Another resource for business owners is the Small Business Administration.  The SBA is now working directly with state governors to provide relief through its Economic Injury Disaster Loan (EIDL) program.  The EIDL program is open to business owners with a need of up to $2 million, offered at favorable rates and also provides an immediate cash injection of up to $10,000 that, if you qualify, won’t have to be paid back. 

There are a few stipulations about applying for an EIDL alongside the PPP loan.  For example, using the EIDL and the PPP for the same purpose could lead to either one of your applications being rejected.  So, the point here is to think carefully about which loan program best suits your financial needs right now before applying.

Figure 3: Other Resources for Small Business Owners

Source: Broadview Macro Research

There are also a number of other initiatives on offer by private organizations aimed at helping small business owners make it through the economic downturn.  For example, GoFundMe and Yelp have partnered to start the Small Business Relief Initiative.  Their aim is to help raise money for local restaurants and small businesses during the COVID-19 related economic downturn.  Facebook is also getting into the act by offering $100 million in cash grants and ad credits for business owners.  And Amazon has also launched its own Neighborhood Small Business Relief Fund.  Truly, many large businesses are finding ways to help out, and there are a number of other resources available at the city, county and state level as well. 

Here in Pittsburgh, the Urban Redevelopment Authority and the Pittsburgh Technology Council have provided a constant stream of important information as far as how businesses can adapt to COVID-19 related issues.  Also, other really important venues to get a handle on what’s going on in your local area are chambers of commerce and small business development centers.  At a national level, the U.S. Chamber of Commerce has been very active in providing knowledge, like in depth articles and webinars and links to financial resources for business owners.  So, we’ve spent a good deal of time covering programs for businesses, what about financial resources for individuals?

Financial Resources for Individuals

Let’s go back to the CARES Act for a moment.  Inside this relief package, Congress set aside about half a trillion dollars and a few provisions to help out individuals and households affected by the COVID-19 outbreak.  This includes 1) direct income payments to households, 2) additional unemployment insurance benefits and 3) some help with education expenses.  Let’s talk about the payments to households first.

Late last month, Congress announced that it would give cash handouts to people with no strings attached.  That is, the money does not have to be paid back and it can be used for any purpose that the recipient sees fit.  The amount on offer includes $1,200 for adults, $2,400 per couple and $500 for each child in the household.  There are certain limits, however, on who can receive the cash handouts.  In order to qualify for the full amount, recipients must have filed taxes with a social security number, have income less than $75,000 in 2019 or $150,000 if filing jointly to receive the full benefit. 

Figure 4: Who Qualifies for CARES Act Stimulus Payments?

Source: Broadview Macro Research

Payments will be issued by the Treasury Department in the coming weeks and if the IRS has your bank information on hand, you can probably have your stimulus check directly deposited into your bank account. If you’re taking Social Security benefits, the way you get paid today is probably going to be the same way you will receive your government stimulus check. 

If the IRS does not have your bank information on file, don’t fret just yet.  The Treasury Department is working on an online portal where you can log in to input your bank information and to receive a direct deposit of your stimulus check.  Otherwise, you can expect a check in the mail or prepaid debit card sometime in the coming months.  If you have become unemployed or are close to being unemployed, know that the CARES Act includes some additional provisions for you as well.

If you become unemployed, you’ll need to contact your state’s unemployment office to see if you’re eligible for benefits and to start a claim.  The U.S. Department of Labor has resources for tracking down this information on its website located here.  The unemployment provision in the CARES Act is there to augment benefits provided at the state level.  More specifically, the legislation provides for an additional $600 payment per week to an unemployed worker.  This amount is in excess and addition to the benefit a person would normally receive in their state unemployment insurance amount. 

Figure 5: The Rising Burden of Student Loan Debt

Source: Broadview Macro Research, Federal Reserve, 4/10/2020

Finally, education costs are a large burden for many households.  If you fall into this group, the government may have you covered. The Student Aid Provision in the CARES Act suspends all payments due on student loans, halts interest accruals and suspends involuntary collection efforts on defaulted loans through September 30, 2020.  In order to qualify, however, your student loans must be either Direct Loan or Federal Family Education Loans (FFEL).  Unfortunately, private loans may not qualify for this benefit.  So, what are some things that you can be doing today to set yourself up for a rebound when the economy eventually recovers?

Setting Yourself Up for a Financial Rebound

What can you do if you’ve lost your source of income?  Well, we believe that one of the first things that you should do is take time to assess your current situation with a mind for how you would like your life to play out on the other side of this this crisis.  That is, think about what you can do right now to not only keep your head above water, but also set yourself up for a financial rebound when the world eventually heals and your circumstances improve.

Figure 6: Setting Yourself Up for a Financial Rebound

Source: Broadview Macro Research

If you’ve lost your source of income, there are a few priorities that you should probably be thinking about right now.  That includes 1) how to preserve and increase cash flows, 2) evaluating saleable assets and 3) assessing your borrowing power.  Whatever the case, do not stop paying your bills without checking with your service providers, lenders or landlord first.  It’s true that foreclosure and eviction orders have been suspended for a time, but you should carefully consider the potential consequences of what may occur after the suspension is lifted.

The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.  – Martin Luther King, Jr.

Survival is of the utmost importance during this time, but you also want to be mindful of the fact that this station in life is only temporary.  From this perspective, every financial decision you make today will have consequences from which a misstep could take years to recover.  Take a page from history and consider the Great Recession.  People who walked away from their homes, whether they wanted to or not, had to sometimes wait seven years before they could qualify for a conventional mortgage. 

Figure 7: Lifetime Mortgage Interest Payments

Source: Broadview Macro Research

Therefore, preserving a solid credit profile throughout the recession means that you may be in a strong financial spot once your source of income returns and you’re in a position to spend money again.  This is notably important when making big-ticket purchases.  For example, with a $200,000 mortgage, the payment difference between a borrower with a low credit score and one with higher credit score can be as much as $200 per month. 

Spread over the lifetime of the loan, this difference ads up to tens of thousands of dollars in additional interest that a person with a higher credit score would otherwise avoid in their mortgage payments.  While we may be talking about houses here, the example also applies to the additional cost of taking out an auto loan, student loan or credit card when you have a relatively lower credit score. 

Either way, if you are in a position where you’ve lost your source of income, remember that there are people ready to help and resources available to you right now.  Besides some of the things that we’ve shared in this report, there are other ways to get help if you need it.  For example, Food Banks across the country are ramping up their operations to help keep families fed regardless of their financial situation.  People are also raising money in a pinch through crowd funding sites like GoFundMe or Facebook.  If you’re in Pittsburgh, other local resources to help pay bills and cover medical expenses are available at the local and national level as well. 

Some Tips for the Employed

It’s true that not everyone will lose their jobs during this economic downturn.  If you’re still employed, you have an even greater opportunity to set yourself up for a financial rebound when the economy eventually recovers.  So, what can you do today?  Well, the stay-at-home orders have given many of us more time to ourselves and time to think.  We suggest using this time to 1) create an action plan outlining how you can be prepared should you lose your source of income and 2) use the time to reevaluate your life goals and financial priorities. 

The future is purchased by the present. – Samuel Johnson

To the first point, we recommend going back and looking through some of the resources mentioned earlier in this report.  Having a plan in place before things hit the fan will make you better prepared to weather a financial setback and give you time to focus on thriving financially.  In terms of reevaluating your financial priorities, ask yourself whether the things that mattered before the COVID-19 pandemic will mean as much or mean more to you when your world heals.  

Then, take some time to determine whether your current wealth creation habits and financial resources are in sync with the priorities that you’ve just laid out for yourself.  If you’re finding a disconnect between your life priorities and financial resources, one place to start is by focusing on upping your wealth creation habits.  This includes taking a hard look at where your financial resources are going every month, reviewing your credit report to find ways to refinance high cost debt and looking for opportunities to make your money work for you.

Stimulus Check: How to Spend It

Finally, many may be wondering what to do with their stimulus check when it eventually arrives.  For some people, the priority may be obvious: buy food, pay bills or simply use the money to take care of friends and family.  For others, the check may represent a windfall with an unassigned use.  To be sure, there are a lot of interesting ideas out there about what you can do with your stimulus check.

If you are in a solid financial situation, meaning that you have adequate cash reserves to see you through 6-12 months of living expenses, we believe that now may be the time to think about how you can support your community.  Demand on charities has gone up in recent weeks.  And at the same time, many charities and non-profits are seeing a drop in charitable contributions.  One thing to consider is that the CARES Act allows for a charitable tax deduction even if you do not itemize your taxes in the coming year. 

Bounty always receives part of its value from the manner in which it is bestowed. – Samuel Johnson

Another thing to consider is that many small business owners are understandably struggling during this uncertain time.  Your stimulus check alone may not seem big enough to help a business owner, but when paired up with your neighbor’s contributions we’re talking about millions of dollars injected into your local community, helping out your local independent restaurant, coffee shop, retailer or other important business. For example, $6 million dollars could flow through a community even if only 10,000 people used half of their stimulus money to buy gift cards or increased their spending at local small businesses today. 

The Key to Thriving Financially: Getting Started Today

We believe that the best way to recover from a setback is to set yourself up for a financial rebound ahead of when the economy eventually improves.  If you’re a business owner or individual who has lost their source of income, do everything within your power to remain solvent and stay in the game.  There are a number of public and private programs available to you right now. 

If you’re fortunate to still have a source of income, we suggest thinking about ways you can help out businesses and individuals in your local community as much as possible.  Also, take the time to make plans for your financial life amidst the downturn and ahead of an economic recovery.  Whatever your circumstance may be, leave no stone unturned when it comes to finding the help you need and know that the key to thriving financially is to take action today.  

About the Author

Peter Donisanu
Peter Donisanu is Chief Financial Strategist and President at Franklin Madison Advisors, Inc. Franklin Madison Advisors is a fee-only fiduciary financial planning and investment management firm based out of Pittsburgh, Pennsylvania and serving clients nationally. We exist to serve a generation that has been underwhelmed by traditional paths to financial security and independence.