In a State of Emergency – What Businesses Need to Know about SBA Loans

Advice

Joel E. Henry Ph.D. | March 23, 2020

The information provided here does not constitute legal, business, or financial advice. It is provided to assist those contemplating or actively pursuing Small Business Administration Disaster Assistance loans due to COVID-19 declarations of states of emergency.

The SBA Economic Injury Disaster Loans have now become available in Montana, and other states, after the state received a federal disaster declaration over the coronavirus. The loans offer borrowers up to $2 million to pay “fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact,” according to SBA information provided here – https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources.

These loans can be paid back over terms as long as 30 years, with interest rates of 3.75% for small businesses and 2.75% for nonprofits. While this all sounds like an excellent option, Businesses and nonprofits should carefully navigate the SBA website and the terms and conditions of these loans. While there is discussion in the US legislative branch as to forgiveness of loans based on the impact of COVID-19, any organization applying at this time (March 23, 2020) should not expect forgiveness of this debt.

But first, a little background.  The SBA does not actually loan any money under this program. Instead, the agency guarantees a portion of loaned funds that actually originate from financial institutions. In the event the borrower fails to repay the loan, the lending financial institution can turn to the SBA (US government actually) to collect the unpaid balance, and interest. Because loans backed by the SBA are lower risk (after all, the US government is standing behind them), financial institutions can offer low rates and fees. SBA loans generally carry very good rates, require less collateral in the form of property or equipment, and have excellent terms.  They also may, but don’t always, require a personal guarantee – meaning the members of the LLC or the principle shareholders may have to accept responsibility for the debt. It is unclear what, exactly, will be required for the Economic Injury Disaster Loans.

That said, government-backed loans are not without their downsides. Because they involve a joint effort between multiple institutions (one of which is the US government), SBA loans tend to have long application processes with a lot of paperwork.  Plus, some small business owners with poor credit, might not qualify for a typical SBA loan. It is not clear how credit background will impact the Economic Injury Disaster Loans. Given these particular loans may be based on actual losses and actual debt, it may be the case that loaned money MUST be used to pay employees, accounts payable, and other real debts to suppliers.  There is no way to know how long an applicant has to wait – even the best SBA and financial institution efforts are likely to be overwhelmed given the impact of COVID-19 on businesses which occurred within a very short time.

Perhaps the first step in applying for an SBA disaster assistance loan is to not begin filling out the application but instead begin collection required documents.  As expected, the supporting documentation is non-trivial. For example, you may need profit and loss statements for the past two years, copies of executed contracts or order forms, employee payroll information, and, of course, the business’ tax returns.  These are not listed among the required documents but the financial institution may require them. The SBA application lists the following requirements: 

  • Tax Information Authorization (IRS Form 4506T), completed and signed by each applicant, each principal owning 20 percent or more of the applicant business, each general partner or managing member; and, for any owner who has greater than 50 percent ownership in an affiliate business. Affiliates include, but are not limited to, business parents, subsidiaries, and/or other businesses with common ownership or management
  • Complete copies, including all schedules, of the most recent Federal income tax returns for the applicant business; an explanation if not available
  • Personal Financial Statement (SBA Form 413) completed, signed, and dated by the applicant, each principal owning 20 percent or more of the applicant business, and each general partner or managing member
  • Schedule of Liabilities listing all fixed debts (SBA Form 2202 may be used)

Yes, this is quite a bit but once you have the information you need, you might want to fill out the forms before jumping into the online application system. 

You can find them here: https://disasterloan.sba.gov/ela/Information/PaperForms

Don’t despair at these requirements.  Remember, if such a loan fits your business, you are likely getting excellent terms and may not be able to borrow money during this unprecedented pandemic from any other source. Be sure to work with your CPA and legal counsel to make certain you are submitting accurate and complete information.  Check back again once the Federal government passes the final legislation offering SBA Economic Injury Disaster Loans in response to the COVID-19 pandemic. 

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