These are unprecedented times that we are living in. Below is some information that employers may find useful as they triage their business. However, the following information is being provided under the caveats that (i) this is general information and your company’s specific facts may change the analysis set forth below (e.g., industry, # of employees, state where employee works, etc.) and (ii) some of this information is moving so quickly that this information may quickly become outdated by new information, new legislation, and new best practices.
The Trump Administration is currently working on a disaster loan program for businesses experiencing economic injury due to COVID-19. From what I have last heard, the Trump Administration has requested $50 billion in loans be made from the SBA. [Side note: to put that amount into context, the SBA’s average debt relief authorizations are less than $1 billion]. Historically, these loans have been given the wake of a natural disaster (e.g., hurricane, tornado, earthquake).
I believe that, in addition to “economic injury disaster loans” (EIDL) there is always the potential of qualifying for the historical “7(a)” SBA loan (which is just a normal SBA loan through a traditional lender, like a bank. Experts are expecting that, in addition to the EIDL) that there will be a greater amount of available “7(a)” loans. For economic injury disaster loans, an applicant will apply directly to the government (i.e, the SBA) rather than through a traditional bank.
Basics of Economic Injury Disaster Loan
The EIDL will be provided to provide the necessary working capital to small businesses to survive until normal operations resume. But, in order to qualify, you will need the following:
The state where your business is located must have been designated as having been impacted by the disaster (i.e., 5 small businesses or more have suffered substantial economic injury). As of the date of this article, Colorado was not yet included in the list of States impacted. But, in my opinion, this is just a matter of time. I expect this to be covered across most of the country.
The business will have had to suffer a “substantial economic injury,” which generally means that the business is unable to meets its obligations and pay its ordinary and necessary operating expenses.
Generally and historically, the SBA has been willing to provide up to a $2 million loan to help meet financial obligations and operating expenses that could have been met had the disaster not occurred. But, should you qualify, your loan would be based on your actual economic injury and your company’s financial needs.
Basic Terms of EIDL
The basic terms of EIDL (at least historically) has been as follows:
- Interest rates not in excess of 4% per year
- Terms not in excess of 30 years (however, longer terms are generally secured by commercial real property)
- Actual repayment terms will be determined based on the ability toe repay the loan
- Will require a first priority lien on all assets of the business
- Will also likely require a lien on your primary residence or possibly a personal guaranty
- If you have other indebtedness (other than accounts payable), especially indebtedness secured by assets of the business, then that indebtedness will need to be re-financed as part of the SBA loan. In other words, if you were to qualify for, say, $500K in EIDL but had $350K of existing indebtedness, the proceeds at closing of the loan will only be $150K.
Process for Applying
Once your state is eligible, you can apply here: https://disasterloan.sba.gov/ela/. Experts expect that the loan application and approval time will be significant in time, as the quantity of these applications and amount of money to be lent will be far beyond the expected capacity.
“7(a)” SBA Loans
As mentioned above, in lieu of an EIDL, you may consider a standard “7(a)” SBA loan, which may have a quicker processing time. However, this is a very different path and will require a qualified SBA banker to assist (We’ve got you covered if you need referrals). But, the experts think that this may be a faster way to get the loan closed.
Experts are expecting that the SBA will be waiving all fees (both to the borrower and the bank) for the loans.
In Section “7(a)” loans, the rules and terms will change based on whether you are requesting a loan that is more or less than $350K. Under 7(a), the maximum that the SBA can currently lend is $5M (though it’s possibly that the SBA may increase this limit based on the COVID-19 situation).
For loans under $350K, we might expect that it be a 10-year term with about a 5.75% interest rate. Depending on your existing indebtedness, it may also be structured as a second position lien on the business assets. Monthly payments would be required immediately. It will require personal guarantees by owners holding more than 20% of the equity of the company. There won’t be prepayment penalties.
Loans in excess of $350K will be similar to above, except that a first priority lien on business assets will be required.
Qualifications for 7(a)
The following is generally required to qualify for the “7(a)” loan. However, it may vary from bank to bank.
- FICO score of 650 for all owners over 20%
- No bankruptcies for the past 5 years
- Been in business for at least 2 years
- Positive cash flow for the last year
Preparing yourself to apply for a SBA Loan
To get yourself ready, SBA experts advise that you prepare the following:
- Get your taxes for 2019 filed (especially if you did well)– you’ll need to show them for the application process. You need to have 3 years of tax returns prepared.
- Personal financial statement (showing assets, debts/liabilities, income, expenses)
- Schedule of existing indebtedness
- Income and Balance Sheets for the Company
- Revise your projected financials (provide a best, moderate, and worst case scenario) based on the existing circumstances