Missouri & Illinois Businesses and Nonprofits Now Eligible for SBA Disaster Loans
Note: This article was originally published on 3.24.2020 and was revised on 4.14.2020 from its previous version to reflect changes in legislation, guidance, and SBA instructions.
On March 21, 2020, the U.S. Small Business Administration has approved Missouri’s request for assistance through the federal agency’s disaster loan program. The legislation comes a few days after the passage of a similar declaration in Illinois. This move makes low-interest Economic Injury Disaster Loans (EIDL) available to small businesses and private nonprofits severely impacted by COVID-19. These loans can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.
A few highlights:
- Loan Amount. The SBA’s EIDLs offer up to $2 million in assistance for each affected small business or nonprofit.
- Eligibility for EIDL is based on the financial impact of COVID-19. It includes most businesses with fewer than 500 employees plus private nonprofits, small agricultural cooperatives, sole proprietors with or without employees, independent contractors, a co-op with not more than 500 employees, an ESOP and tribal concerns. The borrower must self-certify eligibility and substantiate a significant impact by the COVID-19 pandemic.
- The interest rate is 3.75% for small businesses and 2.75% for private nonprofit organizations.
- SBA offers loans with long-term repayments to keep payments affordable, up to a maximum of 30 years, and are available to entities without the financial ability to offset the adverse impact without hardship.
- The deadline to apply for an EIDL is December 21, 2020.
The response to the new loan program is expected to be overwhelming. We anticipate many of our clients will seek out these loans to fund short-term cash flow shortages as part of their overall plan to combat interruptions in their business during the COVID-19 pandemic.
To help you asses this opportunity and also with the application process, we have put together a list of FAQs for quick reference.
How do I apply?
Unlike traditional SBA lending, where a borrower would apply through a local lender, the SBA’s disaster loan personnel will be handling all applications directly. Business owners can apply using three methods: (1) online through the SBA’s website, (2) in-person at a disaster center, or (3) by mail.
How much can I borrow?
As a small business, you may borrow up to $2 million for economic injury.
What terms can I expect for my loan?
Currently, the interest rate for EIDLs is 3.75% for businesses and 2.75% for nonprofits. The maximum term allowed for the EIDL is 30 years. The term loan will ultimately be determined with the underwriter based on your facts and circumstances.
How will my application be evaluated?
The exact nature of the evaluation process is unknown but highly anticipated to be dependant on each applicant’s facts and circumstances. Before applying, consider the following:
- The SBA disaster loans are targeting short-term funding for going concern businesses.
- EIDL intends to provide financing for healthy enterprises experiencing a downturn as a result of COVID-19.
- Businesses and organizations that were distressed before the COVID-19 pandemic, likely will not receive approval.
- The SBA will evaluate an organization’s operating expectations. How an organization intends to respond during and after the pandemic will influence approval (i.e., will the organization close down in the short term, downsize, return to full operations post-outbreak, etc.)
- Organizations will need to tell their story and explain how the pandemic affected operations and how the financing will help financial and operational recovery efforts.
- Organizations will also need to explain how COVID-19 may impact their employees. The SBA is in the business of creating jobs. Organizations should demonstrate how this financing will enable them to continue operations with minimal disruption for employees.
How much money do I need?
The most fundamental part of this process is a determination of how much money your business will need. The timeline of the COVID-19 impact is uncertain; some say 30-60 days while others say much longer. The availability of additional lending should ease some anxiety, but we are recommending clients ask for enough to fund a six month downturn in revenue. The funding should be one part of an overall “recession” plan for the business to put the company in a position to survive the COVID-19 pandemic. As with the loan term, the loan amount will be determined with your underwriter and be based on your facts and circumstances
How can the funds be used?
The funds are intended to satisfy short-term funding needs and working capital. The EIDL is not designed to be a tool for refinancing long-term debt at favorable terms. The intent is to fund business expenses related to fixed and variable costs, including payroll, health insurance, benefits, occupancy, etc. It is also intended to support normal working capital levels that may be adversely impacted due to COVID-19.
What will I need to apply?
We recommend all borrowers use the online application process, if possible.
The following sample documents can be referenced to understand better what documentation will be needed to complete the forms.
- Form 5 Disaster Loan Application. This form includes general filing information and serves as the main application. The form will need to be filled out completely and signed by the owner(s).
- Form 1368 Additional Filing Requirements. The applicant must establish that the claimed economic injury is substantial and is a direct result of the declared disaster.
- Form 413D Personal Financial Statement, Disaster Programs. The borrower will be required to disclose their personal assets and liabilities as part of the creditworthiness process.
- Form 4506-T Request for Transcript of Tax Return. This form allows the SBA to request a transcript of your IRS filings, typically three years for both the company and the owners personally.
- Form 2202 Schedule of Liabilities. The information contained in this schedule is a supplement to your balance sheet and should balance the liabilities presented on that form.
- Supplemental Information. The borrower may have to upload additional information, including but not limited to, the most recently filed federal income tax return (explanation if not filed), personal tax return of any 20% owner, year-end profit and loss statement, year-end balance sheet and current year-to-date profit-and-loss report.
How long will the application take to complete?
The process ranges based on the complexity of your business and the thoroughness of your application. We do recommend accessing the SBA website during off hours, which are from 7 p.m. to 7 a.m.. The site is experiencing heavy volume during regular business hours.
Can I borrow more than once?
Yes, business owners can apply for an EIDL through December 21, 2020. The program does not currently limit the number of loans but does have a cumulative maximum of $2 million, generally.
What if I own more than one business?
The eligibility test is subject to aggregation with affiliates. The SBA affiliation test is complicated, but generally includes the aggregate of 50% commonly owned entities. The related party rules need to be considered.
Will this loan be forgiven?
While loan forgiveness is not outside the realm of possibility, we encourage everyone to model this debt as if it will be paid back in full under the terms of your agreement with the SBA. As part of your due diligence, the principal and interest payments should be included with your current cash flow needs. We also recommend modeling this additional debt to ensure you are not violating any bank covenants.
Do I have to inform my current lender?
The easy answer is yes, although you may not be contractually required. We would encourage all businesses to engage in meaningful conversations with their debtholders if they have not already done so. In times of distress and economic downturn, companies need to be in constant communication with lenders.
How long will it take to get my money?
The short answer is we do not know. The EIDL is typically reserved for disasters impacting a specific area, thus a finite number of businesses. A recent example of this type of lending is the flooding that devasted Houston, TX, in past years. It is difficult to find an economic scenario that mimics the global impact of COVID-19. With that being said, the current guidance suggests 2-3 weeks, but please keep in mind this timeframe is more applicable to focused disasters, not a pandemic. We are urging clients to use this source of funding as a medium-term solution and not set the expectation of loan funding in the short-term.
Are nonprofits included?
Yes, nonprofits are eligible to apply for an EIDL. This is contrary to typical SBA lending, so we want to point this out to our nonprofit clients.
What is considered a “small” business?
Most employers with 500 or fewer employees will be eligible. However, if the SBA size standards exceed 500 employees, then the business will be eligible. The SBA-NAICS table can be found here.
What if I get the money and don’t need it?
The EIDL does not have a pre-payment penalty. We do not recommend businesses apply for loans unless needed, as this could take money away from those who do need the funding (aka stockpiling hand sanitizer and toilet paper). With that being said, if you are awarded more cash than you use, the funds can be paid back to the SBA without penalty.
Will I be required to guarantee personally?
Yes, if the loan is over $200,000. The SBA requires a personal guarantee from all individuals who own 20% or more of the business. The guarantee will also include your spouse in most cases.
What is the grant?
The applicant is allowed to request an advance, separate from the loan, in an amount up to $10,000 or $1,000 per employee, whichever is less. An advance may be used to maintain payroll, provide sick leave and interrupted supply chain costs. An applicant shall not be required to repay any amounts of an advance.
Can I also participate in the Paycheck Protection Program?
An applicant’s participation in the EIDL program does not preclude them from participating in the PPP loan program.
When do my payments start?
Applicants receive a deferment of one year.
As accountants and trusted advisors, we are here to help our clients through difficult times. We can help you through the application process, documentation gathering, and financial modeling to ensure your business is doing all it can to survive the economic downturn. If you’d like to learn more about this service, contact David Killion at firstname.lastname@example.org or 314.983.1304, Jen Vacha at email@example.com or 636.754.0230, or your Brown Smith Wallace advisor.