Covid 19-March 23- Overview of Small Business Loans and Proposed Changes Considered by Congress

March 23, 2020

The COVID-19 pandemic has disrupted every facet of the American economy, perhaps none more so than small businesses. Small businesses make up between 89-99% of all American businesses. Many of these companies are facing severe hardship as their customers are confined to their homes. The federal government has taken significant action to bolster the Small Business Administration (SBA), expanding loans disbursements and relaxing some rules to get loans out to more companies. This post will give some background on what business owners should know about small business loans and what changes the Federal Government has already made and is considering.

SBA loans are designed for small businesses by offering low interest rates and flexible repayment terms. When securing a small business loan, the SBA acts as a guarantor for a company securing the loan from a third party, like a credit union or a bank. If a business were to default on its loan, SBA guarantees up to 85% of a loan of $150,000 or less and 75% of loans above $150,000, but the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), under consideration by Congress, would guarantee 100% of the loan.

The SBA’s most common type of loan is a 7(a) loan, which normally provides up to $5 million dollars and funds working capital, expansion, and equipment purchases. However, the CARES Act would raise the loan limit to $10 million and eliminate the program’s total loan limit, which was $30 billion. The Act, according to Senator Marco Rubio, Chairman of the Senate Committee on Small Business and Entrepreneurship, “expands the allowable uses for 7(a) loans to permit payroll support, including paid sick leave, supply chain disruptions, employee salaries, mortgage payments, and other debt obligations to provide immediate access to capital for small businesses who have been impacted by COVID-19.” The SBA also offers 504 loans, which are intended for facility and machinery purchases, and microloans, which are intended for startups and capped at $50,000. Express loans provide a quick application turnaround on up to $350,000, paid back in 7 years. The Community Advantage pilot program awards loans up to $250,000 to businesses in underserved markets.

Lastly, the SBA offers disaster loans of up to $2 million. While disaster loans normally serve businesses affected by natural disasters like hurricanes and tornados, the SBA has declared that businesses affected by the COVID-19 pandemic will qualify. Each state must individually apply to the SBA for its businesses to be eligible, showing that a sufficient number of businesses have been affected. The SBA has relaxed rules for meeting this standard, making it easier for states to become eligible. As of Monday, March 23rd, small business owners in the following states are eligible to apply: California, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Indiana, Maine, Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Rhode Island, Utah, and Washington. The official list is available and will be updated here. Counties bordering states with declared disasters can also be eligible, so it is worth checking the SBA website even if your state has not yet declared a disaster.

Disaster loans come with an interest rate of 3.75% for small businesses and 2.75% for non-profits. The loans come with repayment terms of up to 30 years that are based on each individual company’s ability to pay, determined on a case by case basis.

In addition to expanding the uses for 7(a) loans, the CARES Act would provide cash flow assistance for businesses that maintain their payroll through the pandemic and provides $240 million in grants for counseling and training programs provided by SBA Small Business Development and Women’s Business Centers, among other measures.

If your business does decide to apply for an SBA loan, there is some information you’ll want to prepare ahead of time to give your loan application the greatest chance of success. This includes a statement of your personal history (from the CEO or owner of the business), a personal financial statement, and three years of personal income tax returns. You should also have three years of your business’ tax returns, your business certificate or license, your business lease, and a loan application history.

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