Updates on SBA Disaster Loans
Note: This article was originally published on 3.25.2020 and was revised on 4.6.2020 from its previous version to reflect changes in legislation, guidance, and SBA instructions.
On March 21, the U.S. Small Business Administration (SBA) approved requests from both Missouri and Illinois for assistance through the federal agency’s disaster loan program. We released a previous article covering the initial details of the Economic Injury Disaster Loan (EIDL) program, which can be found here. The SBA continues to release additional information surrounding the EIDL program as more and more applications are being processed.
The response to the program has been overwhelming, which has caused delays in answering questions, finding information about the program, and accessing the online portal. To put things in perspective, the SBA disaster customer service team is processing approximately 20,000 phone calls a day. In addition to the phone calls, they are receiving thousands of applications through their portal. To handle the volume, the SBA is adding resources in the interim but is asking everyone to be patient. They are also asking applicants to use the portal during the off-peak hours of 7:00 PM to 7:00 AM, when possible. The SBA is continuing to encourage online applications even though applications can be mailed. The online process will assign the applicant with an application number, confirmation of submissions, and the ability to sign in for status updates on their application.
The anticipated process time for an application is three weeks, and then it will take an additional week before funds are available to the borrower. As we mentioned in our previous article, these are not a solution to immediate funding needs. We strongly recommend reaching out to your current lender for short-term conventional loans to help through this interim period. Please keep in mind that these interim loans are eligible to be refinanced with SBA EIDL proceeds (if your application is approved). While the disaster loan proceeds cannot be used to refinance long term debt, the proceeds may be used to make payments on fixed debt, including obligations on existing SBA 7(a) loans.
We want to remind everyone that there is no cost to apply for an EIDL. Also, the SBA has not disclosed a minimum credit score to qualify for EIDLs, so do not assume you are not qualified because of a prior denial due to a lack of creditworthiness. If a business is unsure if they qualify for a disaster loan, they are encouraged to apply so an underwriter can review their specific situation.
With the influx of applications, we have answers to another round of frequently asked questions, which are below. Our initial list of FAQs can be found in the original article.
SBA guidance on loan details:
- SBA disaster loans are made directly from the SBA to the business; the application and loan closing process does not flow through a lender as with 7(a) loans.
- All EIDLs will automatically include a 12 months loan payment deferral for the first payment on the EIDL. (Tip: When creating proforma financials to assess the additional cash flow requirements, keep in mind these payments will be deferred.)
- The SBA has suspended the rule requiring real estate to be pledged as collateral for these EIDLs. The SBA will take a security interest in the business’ assets, however.
- The EIDL is not subject to the “credit elsewhere test”.
A few questions we can answer on the forms:
- There is no loan amount field for the applicant to complete on the loan application (Form 5). The SBA underwriter will analyze the financial information submitted and calculate an amount for which the applicant may qualify. A preliminary amount is determined by taking the business’s gross profit divided by twelve, then multiplied by six months to estimate the amount of working capital needed to address the anticipated cash flow shortfall. The underwriter will contact the applicant to discuss their needs and the proposed loan amount based on their unique situation. (Tip: We recommend working with your trusted financial advisor and accountant to determine this number on your own to compare it with the SBA’s determination. Your business may have nuances that complicate this calculation, namely seasonality and your definition of “gross profit.”)
- The applicant will be asked on Form 5 Disaster Loan Application if they own 50% or more of another business. For this question, the applicant is the business and not the individual filling out the application. (Tip: There’s confusion over question #16 on the form. When it asks if you own 50% or more of another business – the question is asking if the company owns another business. Don’t answer yes for the individual’s ownership of another business.)
- The SBA is waiving the requirement for applicants to submit tax returns with their application for an EIDL. The underwriter, however, may ask for the tax returns during their review. (Tip: Be prepared to submit the most recently filed tax return as well as additional returns. We also recommend having an extension ready if the current year return has not been filed.)
- An application will not be held up if Form 4506-T Request for Transcript of Tax Return is not initially submitted. Still, loan proceeds will not be disbursed without an adequately completed 4506-T. The form should grant authority to obtain copies of the last three years of tax returns. (Tip: Make sure to show the proper name of the business. If the corporation files Form 1120 in their business name but complete the 4506-T authorizing a Form 1120 in their personal name – the IRS will return the transcript as no record found, which will delay loan closing.)
We also have some further clarity on eligibility:
- Private nonprofit organizations are eligible for EIDLs. The program has been expanded to include most businesses with 500 or fewer employees.
- Agricultural businesses are not eligible for EIDLs. The USDA Farm Service Agency has a disaster loan program for agriculture businesses.
- Owners of apartment buildings are eligible for EIDLs for loss of rent income.
Brown Smith Wallace and other SBA resource partners are available to provide free mentoring and counseling to small businesses to help them through this challenging time. We encourage you to reach out to us directly or contact your local Small Business Development Center, SCORE, Women’s Business Center, or Veterans Business Resource Center. These partners are a fantastic resource and are staffed with intelligent and caring professionals.
The St Louis District Office is planning to host webinars on the EIDL program. If you have interest in joining the webinar, please let us know, and we can provide you with the meeting information when it becomes available.
As with most things COVID-19 related, the situation is fluid, but we will do our best to keep you informed as more details become available.
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.