COVID-19 Stimulus Bill: SBA Disaster Loan

Many small businesses, eCommerce and startups face financial difficulty and lack of cash flow due to Coronavirus. One of the federal government responses to the economic crisis the COVID-19 has created, is a debt relief provided by the Small Business Administration (SBA). Under the Coronavirus Preparedness and Response Supplemental Appropriations Act, the SBA is offering low-interest federal disaster loans of up to $2m, for working capital for small businesses in all U.S. states and territories.

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In this blog we will provide an overview of how the SBA Disaster Loan works, how to apply for the loan and the deadline for the application.

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Who can apply for the SBA Disaster Loan?

In general, the SBA Disaster Loan, serves people who are affected by natural disasters such as earthquakes, floods, tornadoes, and hurricanes. The Coronavirus Preparedness and Response Supplemental Appropriations Act has included COVID-19 as a disaster that entitles for an SBA Disaster Loan, which is also known as the Economic Injury Disaster Loan (EIDL).

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Small businesses in all U.S. states and territories are eligible to apply for the SBA Disaster Loan. Small businesses of all tax statuses (e.g., C corporation and S corporations) can apply to the EIDL. This includes self-employed individuals and independent contractors. Contractors may need to prove they are separate from the businesses they serve (and are not actually employees of the business they serve). The loan is geared towards small businesses with less than 500 employees. However, businesses in certain industries may still apply if they meet the SBA's size standards for those industries.

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As opposed to the "traditional" SBA Disaster Loan, the EIDL does not require that the borrower has been unable to obtain loans from elsewhere.

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SBA Disaster Loan - Terms

The SBA offers loans of up to $2 million for businesses affected economically by COVID-19. The loan will be extended by the SBA approved lenders. However, the application process will be done through the SBA.

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The final loan amount is expected to be determined based on the amount of business operating expenses. The interest rate of the SBA Disaster Loan would be 3.75% for for-profit businesses, and 2.75% for non-profit organizations. The SBA Disaster Loans term is 15 to 30 years, which makes them more affordable to small businesses.

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Repayment of the loan can be deferred for up to one year after the initiation of the loan. However, it is important to note that interest will accrue during the deferment period.

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The SBA will request collateral if the loan exceeds $25,000, but the failure to provide collateral does not disqualify the application. For loans of more than $200,000, the borrower may be required to submit personal guarantees.

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The approval process of the EIDL loan may take some time. Therefore, in order to offer immediate assistance, the SBA offers an Emergency Economic Injury Grant of up to $10,000, which is expected to be transferred to the borrower within a few days of completing the application and submitting the relevant documentation (as applicable). The grant is not required to be repaid and does not accrue interest, even if the business application for the EIDL subsequently denied. It is still unclear how the amount of the grant will be calculated.

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What Can The EIDL Funds Be Used For

The EIDL is intended to give your business additional working capital to keep your business running throughout the COVID-19 pandemic. As opposed to the Paycheck Protection Loan, the borrower can use the funds for no specific business purpose.

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How to Apply for an SBA Disaster Loan

Unlike the Paycheck Protection Program loan, the EIDL loan is obtained directly through the SBA, rather than through an approved SBA lender.  Small businesses can apply for a EIDL directly on the SBA website in a streamlined process.

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You will need to provide the following information for applying:

• General information about your business, including legal business name, business address, EIN or SSN, organization type, business activity, number of employees and other contact information;
• Gross revenues of the business for the 12 Months Prior to January 31, 2020;
• Cost of goods sold for the 12 Months Prior to January 31, 2020;
• For rental properties (residential and commercial) only -- amount of lost rents due to COVID-19 economic disaster;
• Amount of compensation from other sources received as a result of COVID-19 economic disaster (including money received under the Paycheck Protection Loan);
• Information about the business' owners;
• The business bank account information;
• Additional information such as if the applicant or any listed owner is currently suspended or debarred from contracting with the Federal government or receiving Federal grants or loans.

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During the application process, remember to check the box next to "I would like to be considered for an advance of up to $10,000." You will then be considered by the SBA for the grant of up to $10,000, which can be transferred to your bank account a few days after you finish your application and provide the relevant documentation requested by the SBA following the submission of the application.

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After reviewing you application and credit rating, an officer may contact you to request for additional information to support your application, such as recent tax return, financial statements, copies of relevant business certificates, licenses, and leases (if applicable), history of previous loan applications and information regarding assets that may be used as a collateral.

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SBA Disaster Loan Forgiveness

Unlike Paycheck Protection Program loans the SBA Disaster loans are generally not forgiven, and the borrower will be required to repay the loan principal.

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Under certain circumstances (such as business shut-down and dissolvement) the SBA may determine that you are unable to repay the loan according to its terms, and agree to cover up to 75% of the loan amount.

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Deadline For SBA Disaster Loan Application

The deadline to apply for the EIDL loan is December 21, 2020.

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However, it is advised to apply as soon as possible, so you can enjoy the grant of up to $10,000, as the funds allocated by the government for the grants are limited (as opposed to the EIDL loan amount).

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Going forward

The EIDL is an opportunity for small business, eCommerce and startups to receive working capital to continue running their business despite the challenges of the COVID-19 economic crisis. In order to apply for the EIDL and the Emergency Economic Injury Grant, your financial information should be ready and available. Finaloop is here to assist you closing your books, understand your rights and navigate through the information and the documentation that may be required for the application to the EIDL and the grant.

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For more information regarding the opportunities under the CARE Act read here.