With multiple rounds of government financial help issued by banks having run out, small and medium-sized businesses (SMBs) are still feeling the economic fallout of the COVID-19 pandemic. Rising inflation, recession fears, supply-chain delays and fluctuating labor costs make disruptions to daily business even more severe.
According to a 2022 survey from the Federal Reserve, 85% of SMBs experienced financial difficulties in 2021, an increase of nearly 20% from the same time in 2019. Those that sought loans back then did so to expand. But as rates increase, banks have been less inclined to extend loans to SMBs that need funds for essential operating expenses.
Businesses still in need of economic support and the banks assisting their clients who need access to funds may be missing out on a critical lifeline: the Employee Retention Credit (ERC).
Dial back the clocks to the launch of the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. To get cash out as quickly as possible for the first batch of government financial aid, big banks simply distributed loans to the businesses they had pre-existing relationships with. News reports stated that nation’s biggest banks specifically prioritized the applications of wealthier clients before turning to other smaller loan seekers.
To combat this disparity, the FDIC issued a statement explaining that “assistance provided in a prudent manner to borrowers facing short-term setbacks could help the borrower and a community to recover,” and that “effective loan accommodation programs may involve protracted resolutions, but all should be ultimately targeted toward loan repayment.”
The Small Business Administration, the PPP’s government administrator, admitted roughly 600 new lenders in 2021 to open up opportunities for more loans. The associate administrator for SBA found that these efforts were “a step in the right direction…to support the smallest of small businesses—mom-and-pop, women-and minority-owned businesses.”
A step in the right direction remains little consolation to SMB owners that are still struggling and banks that are trying to help them. The good news is that there are options, including the aforementioned ERC. The one problem is that not many banks looking to provide financial assistance and get better at providing cash to SMB clients know about it or are more likely to not use trusted ERC providers to issue reimbursements.
The ERC was created via the CARES Act to serve as “a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees” during a set period from 2020 to 2021. The ERC expired at the end of 2021, but bank customers still have time to retroactively claim eligibility for reimbursements, which is up to three years from the end of the program.
The basic ERC applies to wages (inclusive of the cost of employer-paid health benefits) that were paid or incurred from March 13, 2020, through December 31, 2021; and to businesses with 500 employees or fewer. But there are fluctuating rules and regulations that complicate the prolonged verification and filing process for SMBs bogged down by tax return bureaucracy and banks that are unable to expertly guide them through the complex process.
All parties involved must also make sure they are cautious of scams. The IRS issued a press release in October, warning banks and their clients to “be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true.” Legitimate ERC providers can help mitigate the risk that SMBs and banks issuing funds end up getting involved with fraudulent companies that often charge large upfront fees, improperly state wage deductions for financial gain, or have no accredited experts.
The ERC won’t be around forever, so the longer that banks wait to help SMBs apply for reimbursement, the more likely that the amount they are entitled to decreases. Using trusted bank partners and ERC professionals is the best path forward for obtaining this credit lifeline.
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