Small Business Loans in the Midst of COVID-19
by Madelyn McConnell
March 26, 2020
Dear Small Business Customer:
Your friends at Grand Savings Bank understand you are experiencing so many challenges during this uncertain economic period, and your concerns may feel very overwhelming as you work to keep your business afloat. We are fully committed to our role as your financial services partner—not just when things are easy, but whenever you need us. To ensure you are aware of loan options designed to help in exactly times like these, we would like to offer you some important information as well as additional support if you have questions.
The U.S Small Business Administration (SBA) is now offering low-interest federal disaster loans to provide working capital for eligible small businesses and nonprofit organizations suffering substantial economic injury as a result of the Coronavirus (COVID-19).
In particular, the Economic Injury Disaster Loan (EIDL) is designed to assist businesses working to recover from economic injury (as opposed to business loans available to aid in recovery from a physical disaster.) These special loans are made directly by the SBA and do not involve an outside lender to process or service the funds. Applicants may receive assistance to help cover financial obligations and operating expenses that could have been met if the disaster had not occurred. As we understand it at this time, the disaster center is looking at a 6-month timeline for funds to be available for needs directly related to the COVID-19 pandemic.
Because SBA’s working capital loans are different from other SBA loans, here are important details for you to understand in case this funding source is an option you would like to pursue:
- SBA’s Economic Injury Disaster Loan (EIDL) funds come directly from the U.S. Treasury.
- Applicants do not go through a bank to apply. Instead, applicants may apply directly at no cost to SBA’s Disaster Assistance Program at sba.gov.
- There is no obligation to accept a loan if it is offered—in case something changes between the time you apply and when you receive approval.
- The maximum unsecured loan amount is $25,000.
- Applicants may have an existing SBA Disaster Loan and still qualify for an EIDL for the COVID-19 disaster, but multiple loans cannot be consolidated.
- Anyone who believes they may be eligible should apply.
Are YOU eligible to apply?
SBA’s Economic Injury Disaster Loans (or working capital loans) are available to small businesses, small agricultural cooperatives, small aquaculture businesses and most private nonprofit organizations. If any of the following describe your operation, you are encouraged to apply:
- You own a small business or operate a private nonprofit directly affected by this disaster. If you apply as a small business you must meet the SBA’s standard of size in order to qualify.
- You own a small business that offers services related to the businesses in the declaration.
- You own a business that is indirectly related to industries likely to be harmed by losses in your community. Product manufacturers may be eligible, as well as wholesalers and retailers.
Start-up businesses may find it more difficult to show ability to repay without a year of financial statements. If a start-up applicant is declined, there will be an opportunity for reconsideration and the business can provide extra documentation to support their position. In part, eligibility will be based on how taxes are filed.
What are some examples of small businesses that may apply?
Eligible industries include but are not limited to the following: restaurants, retailers, manufacturers, sports vendors, owners of rental property, souvenir shops, travel agencies, hotels, recreational facilities, charter boats, wholesalers and more.
What types of businesses are not eligible for an Economic Injury Disaster Loan (EIDL)?
- Agricultural Enterprises—If the primary activity of the business (including its affiliates) is as defined in Section 18(b)(1) of the Small Business Act, neither the business nor its affiliates are eligible for EIDL assistance. Please contact USDA or the States of Arkansas and Oklahoma for assistance. The disaster center describes an “ag enterprise” as one that is “grown, fed, or watered.” Except for agriculture aquaponics, these businesses are not eligible.
- Religious or Charitable Organizations and government owned concerns
- Businesses that are considered hobbies
- Gambling organizations that receive more than 1/3 of their annual gross revenue from legal gambling activities
- Speculative real estate businesses, such as developers who subdivide and develop lots
How do I know if my operation qualifies as a “small business”?
Visit: https://www.sba.gov/document/support-table-size-standards for more information.
At this time, almost all eligible small businesses will qualify. The SBA will decide on eligibility based on the information provided in the application. SBA loan officers will review each loan package on a case by case basis to make decisions that will best help small business owners.
What kinds of nonprofits may apply?
Wide-ranging types of organizations do qualify for funding. Examples include nursing homes, food kitchens, museums, educational facilities, senior citizen centers, daycare centers, playhouses, community centers, shelters, rescue organizations, associations and more.
An eligible private nonprofit organization is a non-governmental agency or entity that currently has the following documentation:
- An effective ruling letter from the U.S. Internal Revenue Service granting tax exemption under sections 501(c), (d) or (e) of the Internal Revenue Code of 1954 OR
- Satisfactory evidence from the State demonstrating the non-revenue producing organization or entity is a nonprofit organized or doing business under State law
Nonprofit status can be based on either state or federal tax law. The disaster center is encouraging any private nonprofit to apply; the loan officer will review and make the determination on eligibility. Nonprofits will need to provide tax returns, regardless of the requested loan amount.
SBA Terms for EIDL
How much can I borrow?
- Eligible entities may qualify for loans up to $2 million
- The interest rates for this disaster are 3.75% for small businesses and 2.75% for nonprofit organizations—with terms up to 30 years
- Eligibility for these working capital loans is based upon the size (must be a small business) and type of business, along with its existing financial resources
How can I use these working capital loan funds?
- Fixed debts
- Accounts payable
- Other bills that could have been paid had the disaster not occurred
These loans are not intended to replace lost sales, decreased profits or to fund expansion, but are instead intended to pay bills that occur in the ordinary course of doing business. The assigned SBA loan officer will determine the loan amount and term based on the financial information provided in the application process—taking into consideration things such as loss of revenue based on the COVID-19 pandemic.
There are no prepayment penalties, and recipients may utilize a 12-month deferment. Loan payments will not be required during this optional deferment period, but interest will continue to accrue.
What are the criteria for a loan approval?
- Credit History: Applicants must have a credit history acceptable to SBA and will assessed on a case by case basis. The agency will pull a credit report but will not look solely at the applicant’s credit score. The loan officer will review credit history as well as repayment ability.
- Repayment: SBA will seek to determine that any applicant business has the ability to repay the SBA loan.
- Collateral Requirements:
- Economic Injury Disaster Loans over $25,000 require collateral
- SBA accepts real estate as collateral when available
- SBA will not decline a loan for lack of collateral, but does require borrowers to pledge what assets are available
Collateral will be required for loans over $25,000, but generally a lack of collateral will not be the sole reason for declining a borrower. If an applicant’s financial statements show available collateral, the SBA may ask for those assets to be pledged. The SBA typically looks first to real estate and then to other business assets as sources for collateral.
What to have prepared before making application:
- Gather necessary documents:
- Tax Information Authorization (IRS Form 4506T) for the applicant, principals and affiliates
- The Tax Authorization Form (IRS Form 4506T) allows the IRS to release tax information to a requesting organization, such as the SBA. Information submitted on this form must match the information provided on the applicant’s tax returns. For example, if an applicant uses the name “Bill” on IRS Form 4506T but filed tax returns using the name “William”, the IRS will not provide SBA with information
- Complete copies of the most recent Federal Income Tax Return if seeking a loan over $500,000
- Income tax returns will not be required for loan applications requesting less than $500,000
- Schedule of Liabilities (SBA Form 2202)
- The Schedule of Liabilities Form (SBA Form 2202) is a list of obligations that shows the original amounts and dates, current amounts and dates, whether each obligation is current or delinquent, maturity dates, payment amounts and how each is secured
- Personal Financial Statement (SBA Form 413)
- This form is used to analyze repayment ability and creditworthiness. It includes personal (not business) assets, liabilities, sources of income, notes payable, stocks and bonds, real estate owned and various other assets and liabilities
- Complete copies of the most recent Federal Income Tax Return if seeking a loan over $500,000
- Other information may also be requested:
- Complete copy, including all schedules, of the most recent Federal Income Tax Return for principals, general partners or managing member, and affiliates (see filing requirements for more information)
- Year-end profit and loss statement and balance sheet may be needed if most recent Federal Income Tax Return has not been filed, in order to analyze repayment ability and creditworthiness
- Current year to date profit and loss statement
- Additional Filing Requirements (SBA Form 1368) providing monthly sales figures—which is especially important for Economic Injury Disaster Loans
Please note that for partnerships with owners or affiliates holding 20% or more stake in the business, applicants will also need tax information, SBA Form 413 and IRS Form 4506 T for each qualifying owner or affiliate.
For those who have not yet completed 2019 tax returns, there are alternate acceptable documents:
- Additional Filing Requirements (SBA Form 1368) is used to show economic loss based upon a list of month by month sales figures for the last three years and the current year to date. (This form may have been replaced by EIDL Supporting Information Form, ODA Form P 019, which may be provided by the disaster center if needed to support an application)
What to do once ready to apply:
- Have all business/nonprofit financial and tax documents on hand
- Complete the SBA loan application
- Submit a hard copy of SBA Form 5 or SBA Form 5C for sole proprietorships
- OR apply online with auto-populating SBA forms (available for use with Edge, the browser of choice for this process and option that appears to cause fewest problems)
- IMPORTANT TIP: Download the SBA hard copy forms to prepare for the online form submission and then make certain to frequently save the online application while completing it to avoid losing any information
- Although the paper application and forms are acceptable, filing electronically is easier, faster and more accurate
- Helpful Notes for Applicants: SBA Form 5 or SBA Form 5C serve as the actual loan application. Applicants complete specifics of the business such as name, address, phone numbers, formation type, etc. These forms list the types of disasters supported by loan programs, and it is very important to choose Economic Injury (EIDL). All forms may be printed out in advance for applicants to see what information will be needed to complete the process. Like most online forms, any field with a red asterisk (*) is required and form submission will not proceed without the required information.
Common questions regarding the application process:
Q: Why is it taking so long to hear back about my application?
A: The biggest reason for delays in processing is due to missing information. Applicants must make sure to complete all filing requirements before submitting the application and forms.
Q: Can I change my loan amount once I have submitted an application?
A: If more funds are needed, applicants can submit supporting documents and a request for an increase. If fewer funds are needed, applicants can request a reduction in the loan amount.
Q: What if I am denied a loan?
A: If the loan request is denied, the applicant will be given up to six months in which to provide new information and submit a written request for reconsideration. Applicants have two chances to request reconsideration.
Final tips for applicants to know:
- Many questions can’t be answered until the SBA has an actual application in hand to review
- Applicants should call the customer service center for support regarding any error messages
- After submission, applicants will be contacted by a loan officer if more documents are needed to complete processing
- Personal Guarantees will be required
- Once the online process is complete, applicants will receive immediate notification that the application has been uploaded
- The disaster loan center will process loans on a first come, first served basis. Applicants should submit early but not be concerned about funds availability
- Applicants experiencing difficulty with uploading documents should keep trying—or email firstname.lastname@example.org with the assigned application number. The disaster center is working to complete approvals in three weeks, but current unusual circumstances may mean the process could take longer
Important State-Specific Links
Your success and wellbeing matters to each of us at Grand Savings Bank—not just as your financial partner, but as your friends. We know small businesses and nonprofits are the bedrock of our shared community, and we want to help make certain you know about resources that can make a real difference. If we may offer any additional guidance related to SBA’s Economic Injury Disaster Loan program, please don’t hesitate to reach out to our Customer Care Center at 1-800-460-2070 to be directly connected to your lender, or email us at email@example.com.
Wishing you health,
Grand Savings Bank Team