Borrow from your retirement savings
Though using funds earmarked for retirement can be risky, business owners may find it easier to borrow from themselves than from banks or the government, says Kraus. “Taking money from an IRA or 401(k) can be a better stopgap funding measure.”
Thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act, you can withdraw up to $100,000 from a 401(k), IRA, or similar type of retirement account until the end of the year without facing the usual 10% early withdrawal penalty. You can qualify for this special provision if you have experienced financial difficulties resulting from being quarantined, furloughed, or working reduced hours or if you, or a child or spouse, tests positive for COVID-19. You will still pay income tax on the withdrawals, which could bump you up into a higher tax bracket next year.
Alternatively, if you currently participate in a 401(k) plan, you can borrow up to 100% of your vested account balance up to $100,000 within the next six months because of the CARES Act. Unlike with a withdrawal, this money will not be taxed but it must be repaid, typically within five years. If you lose your job, say because the business shuts down, the outstanding balance will be due much quicker, and any funds that are not repaid by the deadline are treated as a withdrawal, meaning you could face a tax penalty and income taxes. You will also pay interest on the loan, but since it is from your own account, you’ll be paying it to yourself.
Apply for government assistance
The CARES Act also provides $350 billion in loan assistance to small businesses with fewer than 500 employees to help cover payroll costs and other expenses during the coronavirus pandemic.
Managed by the SBA, companies can apply for payroll-protection loans, which are intended to cover necessary expenses such as payroll, health care, rent, utilities, and business debts, to keep operations going and retain staff from now until June 30. The program will also be retroactive to February 15, so firms who applied for SBA help earlier in the year can still qualify. Lenders began processing applications for small businesses and sole proprietors on April 3. Independent contractors and self-employed workers can apply starting today.
A business can borrow as much as 2.5 times its average monthly expenses, up to $10 million. Loan payments will be deferred for six months, and neither the government nor lenders can charge any fees.
The SBA will forgive a borrowed amount equal to eight weeks’ worth of expenses, says Lang, but you will need to apply for such forgiveness and provide documentation showing it was used as intended. To qualify, funds must be used for payroll costs, mortgage interest, rent, or utilities, and at least 75% of the amount you’re looking to have forgiven must have been spent on payroll. The forgivable amount will be reduced if your full-time staff declines or if wages decrease. For any loan amount that is not forgiven, the money must be repaid in two years at a super-low interest rate of 1%.
Small businesses can also apply for the SBA’s expanded Economic Injury Disaster Loan program—which traditionally offers aid to businesses located where federally declared disasters occurred, but now covers companies in all states and territories. Businesses can borrow up to $2 million at an interest rate of 3.75% and repay the sum over as long as 30 years. Companies should also try for the program’s emergency advance, a $10,000 sum that does not need to be repaid and is intended to help assuage a temporary loss of revenue because of the coronavirus.
However, receiving the money may take more time than the SBA website states, as some banks, like Citi, have not opened their online applications for such aid yet. Other banks have reported receiving tens of thousands of applications within the first few days, leaving staff overwhelmed. Several large banks have come under fire as well for adding their own requirements that businesses must meet to receive the SBA loans. For instance, Money reports that Bank of America is requiring that loan applicants have a small business lending and small business checking relationship already with the bank, or an existing Bank of America checking account and no other credit or borrowing relationship with another bank.
Finally, several states and municipalities have begun unrolling their own small business loan programs, so it’s worth investigating your state governor and hometown government websites to see if they are offering aid and how to qualify for it. Florida and Michigan, as well as the cities of Chicago, New York, Los Angeles, San Francisco, and Denver, for example, are all offering funding help for small businesses.