An employee retention credit (ERC) bridge loans is a way to get quick capital until more permanent financing can be obtained or other means of funding becomes available. This type of loan gives established cannabis businesses the resources they need for short-term projects such as inventory expansion.
The ERC is a refundable tax credit against certain employment taxes equal to 50% of up to $10,000 in qualified wages that eligible employers paid their employees between March 12, 2020, and Jan. 1, 2021, during the pandemic. This means businesses can potentially receive up to $26,000 per employee for wages paid during this period. Although the program ended in 2021, most businesses have until 2024 or 2025 to claim the credit by filing an amended return.
What is ERC Bridge Financing?
The program provides a refundable tax credit — a grant, not a loan. It can help businesses recover the costs spent on:
- Employee salaries and wages
- Employee benefits
- Health insurance premiums
- Retirement plan contributions
Getting the grant is a process and not available until a tax return is filed and a refund is issued. The ERC bridge loan is an advance of that credit and is typically repaid when an employer claims its employee retention credits.
How Does Getting Advanced Financing for an ERC Credit Work?
Getting advanced financing for an ERC credit typically involves the following steps:
- Determine eligibility: Before applying for an ERC bridge loan, business owners should ensure they are eligible for the program established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
- Research lenders: Business owners should research and compare different lenders offering ERC bridge loans to determine which is the best fit for their needs. This may involve comparing interest rates, repayment terms and other loan terms and conditions.
- Gather necessary documents: Lenders may require business owners to provide financial statements, tax returns and other information to evaluate their creditworthiness. Business owners should have these documents ready before applying for a loan.
- Submit a loan application: Once a business owner has found a lender and gathered the necessary documents, they can submit a loan application.
- Review and sign loan agreement: If the loan application is approved, the business owner will receive a loan agreement outlining the terms of the loan. They should carefully review the agreement to ensure they understand the terms and conditions of the loan.
- Receive funds: Once the loan agreement is signed, the business owner will receive the funds from the ERC bridge loan.
- File an amended return and complete and file Form 941: Business owners must complete and file Form 941, the Employer’s Quarterly Federal Tax Return, to report the qualified wages and calculate the credit.
6 Benefits of Bridging the Financing Gap of ERC Claims
ERC bridge financing allows businesses to access capital that they may not otherwise have available to them because of the stigma and restrictions surrounding the cannabis industry. By securing an ERC credit, businesses can obtain financing to cover operational expenses, make investments in their products or services and expand into new markets. The advantages of getting advanced financing for an ERC credit include:
Bridging the financing gap of ERC claims for cannabis businesses can help increase their access to capital and allow them to expand their operations. By tapping into new sources of capital, businesses can finance important investments in equipment, staff and other resources needed to stay competitive in the ever-evolving cannabis market. Having access to additional capital gives businesses increased flexibility when it comes to developing new products and services that can help them further capitalize on opportunities in the industry.
With the loan funds, cannabis businesses are able to purchase necessary items such as lighting, irrigation and soil-management systems more quickly than by waiting for a conventional loan. Because the terms of an ERC bridge loan typically carry less stringent requirements than traditional loans, cannabis businesses can often obtain needed funds faster than through traditional means.
Real Estate Purchases
ERC advances can also be used by cannabis businesses to make real estate purchases. The advance can provide the business with the capital it needs to expand existing properties or make other real estate investments to help grow and sustain the business.
Purchase Foreclosed Assets
Funds from an ERC bridge loan can be used to purchase cheaper foreclosed inventory, equipment and other resources. This type of financing allows businesses to move quickly when they see an opportunity.
Real Estate Improvements
In terms of improving real estate, ERC bridge loans can provide business owners with the financial resources they need to make upgrades or improvements to their properties. This can include remodeling, repairing or expanding existing spaces or acquiring new real estate to meet growing business needs.
Seasonal Inventory Purchases
Funding can help businesses prepare for busy seasons or meet increased demand without relying on traditional financing sources or draining their cash reserves. It also helps ensure that the business has the inventory it needs to meet customer demand and remain competitive.
Funds While You Wait
If you kept people employed during the pandemic, you may be entitled to the ERC. If you didn’t already claim the credit, you can amend your prior tax returns to claim the credit. It can take some time to process an amendment. According to the IRS, the current processing time for amended returns is 5-10 months. A bridge loan is a way to get an advance of those funds.