This morning, I attempted to contact the SBA in order to get more information for my clients on the Disaster Business Loan. Clearly, I was not alone. I was in line behind 1,132 other callers and was on hold for 1 hour and 54 minutes only for the line to go dead after ringing briefly. I’ve also heard horror stories of businesses trying until 4-am to upload the application to the SBA website. During these unprecedented times, there don’t seem to be and easy answers available and it also seems the SBA is just figuring it out as well. That being said, I’m going to try and summarize what I know about the different options out there for small businesses, including the $2T stimulus package, during this difficult time.
SBA Economic Injury Disaster Loans
The SBA has expanded their disaster loan program and companies in all 50 states are eligible to apply. This is the program in which it is extremely difficult to upload the application and I spent nearly 2 hours on hold to get some additional information for, only to fail miserably. The loans can be up to $2M and used to pay fixed debts, payroll, accounts payable and other bills which can’t be paid due to COVID-19. It is essentially a working capital loan, not an expansion loan. The interest rate is 3.75% for small business and 2.75% for non-profits with a repayment term of up to 30 years. The SBA is allowing payment deferral of up to 1 year.
CARES Act (Paycheck Protection Loans)
The federal government recently passed a record breaking stimulus package which includes $349B in federally guaranteed loans to small businesses. Underwriting and application guidelines have not been specifically laid out as of yet but it essentially eases the burden on the SBA and participating banks to grant small business loans. Currently, there are approximately 1200 participating banks but the intent is to expand it to all FDIC insured lenders. Lenders will use their own paperwork to process loans and get SBA approval within 2 weeks. Banks will not disburse the funds until the SBA fully guarantees them against default.
The stimulus package loans have no fees and interest rates are capped at 4% for both non- and for- profit companies. The loans have a 10 year term with 6 month payment deferral. Loans are limited to $10M and are specifically for businesses with 500 employees or less. Businesses are allowed to get the SBA loan as well as the new CARES Act loan but can only be forgiven for the CARES Act loan.
Aside from the size of the company, the resounding criteria is that companies must be able to prove payroll to employees. The government has broadened the definition of employees to include 1099 contractors. Additionally, independent contractors can apply for the loan. Unlike the aforementioned SBA loans, small businesses would not have to repay portions spent on paying employees, a mortgage, rent or utilities if the money is used within 2 months. However, businesses with recently laid off workers would be required to repay a larger portion of loans. For purposes of the application process, payroll is broadly defined as the following:
- Wages, commissions, salary, or similar compensation to an employee or independent contractor
- Cash tip or equivalent
- Vacation, parental, family, medical or sick leave payments
- Allowance for dismissal or separation
- Group health care benefits costs and premiums
- Retirement benefits
- State and Local payroll taxes
Other items which are not included in payroll for the forgiveness criteria:
- Loans which cover salaries of over $100,000 annually
- Payroll taxes
- Compensation for employees/contractors whose principle residence is outside the US
- Qualified sick leave or family medical leave where a credit is already allowed under the new Coronavirus Relief Act passed last week
The federal government is fully guaranteeing loans through December 31, 2020. Loan amounts are generally limited to the lesser of:
- the sum of 1) average monthly “payroll costs” for the 1 year period ending on the date the loan was made – multiplied by 2.5, and 2) any disaster loan taken out after January 31, 2020 that has been refinanced into a paycheck protection loan
- $10 million
Current details of the stimulus package are unclear with regards to industry specific guidelines and criteria. The legislation indicates that it cannot be used for expansion capital as venture backed funding is typically used for. Private equity owned businesses wouldn’t be overtly prohibited from receiving assistance, but experts have noted that government lending requirements could prevent them from unlocking the aid. Small technology companies and other startups funded by venture capitalists will feel the financial burden, as the legislation regarding loan guarantees for small- and medium-size businesses may exclude them from aid.
State and Local Funding
I would strongly encourage everyone to explore resources available locally. Most states and some hard hit municipalities have assistance programs available. Chicago, for example, has the Small Business Resiliency Fund. This offers low interest loans of up to $50,000 with repayment of up to 5 years. The amount of the loan depends on the revenue the business lost due to virus. Small businesses are eligible if they meet the following criteria:
- 25% drop in revenue
- Less than $3M in revenue and fewer than 50 employees
- No current tax liens or legal judgments
Major corporations are coming out with additional assistance programs. Facebook recently announced the Facebook Small Business Grant program. Although details have not been announced yet, they are offering $100M in cash grants and ad credits for up to 30,000 eligible small businesses.
Google recently pledged $800M to assist small businesses and crisis response. Included in that is $340M in Google Ad credits available to all small businesses with active accounts over the past year. The credits can be used anytime thru the end of the year.
As this crisis continues to develop, more resources will be made available to small businesses. I encourage all companies to explore other options and investigate potential niche funding such as for women or minority led companies. Together we will get through this disaster.