As the impact of the global pandemic grows, increasing numbers of U.S. based small and mid-sized businesses are concerned about retaining talent and meeting short-term obligations.
It is times like these when a strong relationship with your banker as well as other key advisors is important to your business. Beyond your traditional sources of capital, there are some additional options currently available due to the current pandemic. Let’s review a couple of those options.
*business refers to organizations classified as not-for-profit
SBA Disaster Loan Program
Many of us are unfamiliar with this program due to the good fortune of not having been through a Federal Disaster. This SBA Disaster Loan Program is a program currently in existence and available now. Much of the United States is now considered a Federal Disaster Area due to the impact of COVID-19. This allows businesses and not-for-profits physically located in a designated Federal Disaster Area to be eligible for a Disaster Loan of up to $2 million. Borrowers must also demonstrate that they have suffered working capital losses due to the declared disaster. Additionally, the borrower must represent their inability to obtain credit from any other sources. Some key considerations for borrowers considering the Economic Injury Disaster Loan (EIDL) are as follows:
- An EIDL is a direct loan from SBA – not through a bank.
- The SBA EIDL program can provide low-interest loans of up to $2M to businesses and private not-for-profits.
- Eligible for up to a 12-month deferral to begin repayment (new).
- EIDLs may be used to pay fixed debts, payroll, accounts payable and other bills.
- The interest rate is 3.75% for small businesses without credit available elsewhere. The interest rate for non-profits is 2.75%.
- EIDLs have long-term repayment options, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based on borrower’s ability to repay.
- A $25,000 unsecured loan can be issued within five days (realistically due to high demand it may take 30 days).
- Collateral generally required for loans over $25,000. Real estate is collateral that is favored. Personal guarantees are generally required of owners of 20% or more.
- Plan to file a complete application to expedite approval. The biggest reason for delay is incomplete information.
- Borrowers will need up–to–date financial statements including a 6-month cash flow projection.
- Fees incurred to assist in the obtaining the loan can be part of the loan request (appraisals, fees paid to prepare financial statements).
- CPA prepared financial statements may be helpful to the underwriting process but are not required.
- On-line application process is available and encouraged. Apply online at SBA.gov/disaster.or www.disasterloan.sba.gov.
- Use of the funds can be for fixed debts, accounts payable, payroll and other bills. It is generally a working capital loan.
- Real estate owners can apply for a loan based on lost rent and their inability to meet current obligations.
This program currently is receiving a lot of attention due to the widespread impact of COVID-19. Thus, we recommend applying online during off hours to ensure access. Additionally, we recommend a request of 9-12 months of working capital needs.
SBA Small Business Interruption Loan Program
The Small Business Act (SBA) 7(a) loan program is expanded to include Small Business Interruption Loans (SBILs).
This is proposed under legislation being considered in the Senate currently. The summary and analysis is based on the revised legislation released on Sunday, March 22, 2020.
The proposed legislation is designed to keep workers employed as the name, Paycheck Protection Program, would indicate.
Keep in mind that a business who receives funds under the SBA Disaster Loan Program is not eligible for an SBIL. These loan programs are both designed to meet short-term liquidity needs of businesses.
- Here are some key considerations of this proposed loan program:
- Borrowers had to be in operation as of February 15, 2020, had employees or independent contractors, and were substantially impacted by COVID-19 to qualify for an SBIL loan
- These loans will be administered by eligible banks and other lending institutions. A 5% fee will be paid for processing. The fee is based on the original amount of the loan.
- Generally, eligible covered businesses include any business concern, private not-for-profit organizations, or public not-for-profit organizations with not more than 500 employees. Other eligible small business concerns are:
- Businesses with a NAICS code starting with 72 are eligible as long as the number of employees per physical location is less than 500 employees. This includes hotels, casinos, restaurants and other travel and entertainment venues.
- Any business concern operating as a franchise is eligible.
- Licensed SBICs are also eligible. SBICs provide investment capital and loans to businesses.
- Not-for-profits receiving Medicaid expenditures are specifically excluded from eligibility.
- Borrowers may be eligible even if they have access to capital from other sources including existing lines of credit or other debt/equity capital.
- The maximum loan amount is the lesser of: (1) $10 million:or (2) 2.5 times the borrower’s average monthly payroll, benefits, rent, mortgage debt service, non-mortgage interest, and utility costs.
- Borrowers can use the loan proceeds for payroll and benefits, rent, mortgage payments, utilities, and interest on other debt obligations.
- Normal SBA fees are waived.
- No collateral or personal guarantees required.
- The loan has a maximum maturity of 10 years and carries a rate of 4.75%.
- Borrowers can defer repayment up to 1 year.
- The Express Loan limit is increased from $350,000 to $1,000,000. It is unclear how quickly these are intended to be processed and disbursed.
- Loan forgiveness for certain expenses over an 8–week period, starting on the date of the loan origination.
- Forgiveness of the loan is allowed for the total of expenditures that the lender reasonably expects the borrower to expend, during this 8–week period, for payroll and benefit costs, interest on existing debt, rent, and utilities. It is unclear if this includes expenses incurred, but not paid, prior to the date the loan was originated.
- The loan forgiveness will not be considered taxable income to the borrower.
- Specific underwriting requirements and regulations which will better define this program, are not yet available.
- Again, the above is part of the proposed legislation now in Congress that is not final yet. We will keep you posted with the latest developments.
Finally, there are other loan provisions (as well as other incentives and tax changes) in this proposed legislation that might be available to your business. We wanted to highlight this proposed SBIL but realize there could be other loan programs to assist you.
In summary, the proposed SBIL program has provisions for operating businesses that are very beneficial, specifically, the loan forgiveness provisions. We strongly recommend that interested businesses and not–for-profits pull together a concise and accurate 12–month summary of the expenses and debt service payments eligible for this loan now. The 12–month summary should end on the most recent month-end date, likely February 29, 2019. Accurate and complete financial information will be needed by their lender, to disburse this loan and this is something that can be prepared to accelerate the timeline for receiving the loan. While we don’t have final guidance on what information will be required to apply for this loan, we would recommend borrowers begin to collect the following information in anticipation of an EBIL loan application:
- Payroll tax returns for the 4 quarters ended December 31, 2019 and payroll tax records for January and February 2020 showing evidence of deposits.
- 12 months of balance sheets and operating statements starting in March 2019 and ending in February 2020.
- Most recently filed business tax return (2018 or 2019).
- 12–month summary of operating expenses that qualify for an EIBL.
Alternatively, an EIBL loan (aka Disaster Loan) may be the only alternative for businesses that are operating without employees, such as investment real estate where tenants are currently unable to fulfill rent obligations. Careful review of each program in light of the business or not-for-profit’s unique circumstances should be performed. Timing may be a challenge as administrators and lenders will likely be overwhelmed with requests.