CARES Act: How to Apply for a Small Business Disaster Loan

When I first saw the words “small business disaster loan,” my mind read the phrase as the loan itself is a disaster.  Yes, these are the times we are in, where it seems conceivable that a small business loan itself could end in disaster.  However, that’s the opposite of the purpose of the Paycheck Protection Program, which is part of the COVID-19 stimulus package.  Instead, the U.S. Federal Government hopes that the stimulus package will give individuals and businesses alike the means to stay afloat in these choppy waters.

So, how would a business go about applying for a small business disaster loan?  Well, continue here to get the answer to that question, and to find out what’s in the fine print.

COVID-19 Stimulus Package Backstory

Before we get into the small business disaster loan itself, let’s review backstory of the “Coronavirus Aid, Relief, and Economic Security Act.”  While you might hear this referred to as the CARES Act, you will also hear people call it the COVID-19 Stimulus Package.

Photo of an UNEMPLOYMENT INSURANCE CLAIMS OFFICE sign.
Photo by Bytemarks | Source | CC by

Ergo, unless you’ve been spending spring break under a rock on a remote island, you are probably well aware of the turmoil that has seized not only our nation, but large parts of all hemispheres.  In summary, the rapid and seemingly relentless spread of the coronavirus (COVID-19) has rendered many non-essential businesses lifeless, or essentially hanging on life support.  So, the businesses currently at a standstill are trying to decide what the next steps are.  Likewise, the businesses who continue to operate with minimal staff and abbreviated hours are living day to day, hoping for a miracle.  Weekly unemployment claims hit a record 3.28 million. Notably, the previous record was 695,000 in 1982.

Fortunately, that’s where the U.S. Federal Government has stepped in.  On Friday, March 27, 2020, opposition within the government joined forces to swiftly sign a bill allowing the COVID-19 stimulus package (CARES Act) to promptly take effect.  This stimulus package is a much-needed life raft, tossed out to provide relief to those who have been adrift for nearly two weeks now.  Furthermore, if it’s any indicator of the urgency of the situation, many are comparing the gesture of unity within the government to the sentiment felt after 9/11. 

Components of the CARES Act

So, what are the components of the COVID-19 stimulus package?  Now, the act opens by stating its purpose as “Providing emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”  However, we are going to focus on the business portion of the stimulus package.

As an introduction to Division A, the text highlights one of the main purposes of this act to be keeping workers paid and employed.  Consequently, in order to do that, businesses need funds.  Therefore, if their doors are closed and employees are not working, it is challenging for most businesses to continue making money.  So, the CARES Act helps make it possible for small businesses to have the funds they need to pay employees.

The table of contents follows thereafter:

Starting with the Paycheck Protection Program, the section opens with definitions of the following terminology.

  • Covered Loan – The CARES Act text notes that a covered loan is one made under the covered period.
  • Covered Period – The text specifies the covered period as February 15, 2020 through June 30, 2020.  Request for coverage falling outside the covered period will not be granted.
  • Eligible Recipient – The text defines an eligible recipient as an individual or entity eligible to receive a covered loan.
  • Eligible Self-Employed Individual – The text states eligible self-employed individuals as being those who qualify under Section 7002(b) of the Families First Coronavirus Response Act.
  • Nonprofit Organization – The text defines nonprofits as those described in 501(c)(3) of the Internal Revenue Code of 1986 who are exempt from taxation.
  • Payroll Costs – The text lists the sum of payments, including salary, wages, commissions, or similar compensation, cash, tips, payments for time off and leave, dismissal or separation allowances, healthcare benefit payments, retirement benefit payments, and state or local tax payments based on employee compensation.

Then, the act goes on to say that eligible businesses are those with 500 or fewer employees.  The eligible businesses can also be nonprofits, veteran organizations, or tribal businesses.  Notably, businesses who have multiple physical locations may still be eligible for the loan, as long as they do not employ more than 500 employees at that location.  The same thing goes for franchises, also.

Applying for a Disaster Loan

Photo of a small business disaster loan application form with a pen, glasses and a calculator.
Photo by Nick Youngson | Source | CC by

Now, the CARES Act states that in order to apply for a disaster loan, businesses will need to provide the following:

  • Payroll tax filings reported to the IRS
  • 1099-MISC forms
  • Sole proprietor income and expenses

So, businesses need only to visit disasterloan.sba.gov/ela/ to begin the process of applying for the loan.

Loan Amount

At this point, businesses are probably wondering how much aid they can receive. According to the CARES Act text, the loan amount will be up to a business’s sum of the average total monthly payments of the prior year’s payroll.  On the other hand, loan providers will use a slightly different calculation for seasonal employers.  Also, the loan amount will take into special consideration those companies who were not yet in business during the prior year.  Small business disaster loans under the CARES Act will cap at $10,000,000.

Small Business Disaster Loan Funds Distribution

Finally, for the pressing question many are asking:  How quickly can businesses expect to receive aid?  Now, as you are hearing information about the stimulus package, know that there will be at least a couple waves of funding.  Aid to individuals will be the in the first wave, which is expected to have checks on their way out within two weeks.  The small business disaster loans will be in the next wave. 

“The loans for small businesses will be ready for processing this coming week.” Larry Kudlow, Director of the U.S. National Economic Council, said regarding the CARES Act Sunday in an interview on This Week with George Stephanopoulos.  He also said that the government is unlocking massive resources from the Federal Reserve in order continue to provide aid.  Business, however, need to know that they must keep processing payroll in order to be considered for loan forgiveness.  So, if a business receives loan forgiveness, it would essentially be a grant from the government.

It’s important to remember that the funds are truly only to be used for the following purposes:

  • Payroll costs
  • Group health care benefits
  • Employee compensation
  • Mortgage interest
  • Rent
  • Utilities
  • Other debt interest incurred prior to the covered period

Social Distancing and the CARES Act

So, as you can see, the federal government is doing its best to throw a lifeline to businesses, so that they can in turn keep individuals working.  In the case where individuals cannot keep working, they can at least still receive some sort of a paycheck.  However, in order to qualify for a small business disaster loan, businesses will need to meet certain criteria.  Also, they will need to make sure to continue to process payroll, and only use the funds for the purposes outlined within the CARES Act.

In time, hopefully we will all begin to see the positive impacts of minding social distancing, and of loans provided by the CARES Act.  Ideally, these two things will allow us to quickly return to a life where we can freely interact and work without fear of infection.

Image of a hand writing in green marker "Approved!" regarding the CARES Act small business disaster loan.

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This is not meant to provide legal counsel or advice. Every situation is different. Please contact an HR professional or employment attorney before taking any action.

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