The Coronavirus outbreak has forced millions of small businesses across the country — including bars, restaurants, theaters and convenience stores — to shut down, causing staggering economic losses. Virtually no industry has been left untouched by the new norm of social distancing. Businesses have been forced to lay off millions of workers, and many employers have wondered how they will pay the bills in the coming months.
As of the date of this alert, we are awaiting passage of a massive federal stimulus bill. In the meantime, Congress has made one lifeline available to small businesses with up to 500 workers: $7 billion in small business disaster loans, through the U.S. Small Business Administration (SBA) Disaster Loan Program. The SBA has a long-standing Economic Injury Disaster Loan Program (EIDL) which helps small businesses, small agricultural cooperatives, small firms engaged in aquaculture, and most private nonprofit organizations of any size in times of regional or national crisis.
Last week, the governors of all 50 states submitted formal disaster declarations to the SBA, and the SBA approved them. This makes businesses in each state eligible for the SBA loan program.
Under the EIDL program, a for-profit business can borrow as much as $2 million at a 3.75% interest rate. The interest rate is 2.75% for nonprofits, which are normally excluded from SBA loans but are eligible under the EIDL program. The amount of the loan under the program is based on the amount of economic injury in each case.
To be eligible to qualify for an EIDL loan, a small business must have fewer than 500 workers, meet other eligibility criteria in terms of size and industry, and must demonstrate substantial economic injury. A private nonprofit may employ more than 500 workers and still qualify, but it must meet other eligibility requirements. A business may prove substantial economic injury if it is unable to pay its ordinary and necessary operating expenses.
If a business seeks more than $25,000, the SBA requires collateral, preferably real estate. The loan term can be up to a maximum of 30 years. Unlike an ordinary SBA loan, an EIDL loan will be granted directly from the SBA, not through a bank, and there are no SBA fees. The SBA has changed the terms of the loan to allow for one-year deferments. Further, the SBA announced it would defer existing disaster loan payments automatically to December 31, 2020.
In past disasters, it has taken the SBA approximately two weeks to make loan decisions. The normal SBA application process takes 5 days, but the estimate is that it will take 1-3 weeks for Coronavirus crisis EIDL loans to be processed.
How to Apply
The Massachusetts Emergency Management Agency (MEMA) is working closely with the SBA to administer the EIDL program. Previously, eligible businesses were required to submit a survey through MEMA before applying to the SBA, but now all eligible businesses can apply directly to the SBA. To see if your business is eligible, and for application instructions, visit https://disasterloan.sba.gov/ela. You can also contact SBA Disaster Customer Service at 800-659-2955 for further information.
In order to apply you may need to provide the following information (as applicable):
- Contact information for all applicants
- Social Security numbers for all applicants
- Deed or lease information
- Insurance information
- Financial information (including tax returns, income, account balances, and monthly expenses)
- Employee Identification Number (EIN)
- Date of establishment
- Years under current management
- The value of cash, receivables, personal property
- The amount of debts
- The amount of liabilities
- Names and addresses of contacts for loss verification inspection
- Ownership percentages for each owner (as applicable)
- Additional information if any of the owners own a more than 50 percent stake in a different business (as applicable)
- Personal financial statements
Other Disaster Loan Programs for Small Businesses
- The Senate has approved a $2 trillion bailout package, which President Trump has vowed to sign. This bailout, if approved by the House, may include $350 billion for small business “interruption loans” and $500 billion in loans for distressed companies.
- The Federal Reserve reestablished an asset purchase facility initially established during the 2008 financial crisis to encourage banks to make loans to small businesses and households.
- The Federal Reserve plans to announce a new Main Street Business Lending Program to encourage lending to small and medium-sized businesses.
We will continue to monitor the SBA disaster loan program for small businesses and provide updates as developments occur.
For additional information please contact Joy Karugu (email@example.com; 617-456- 8066). Joy’s practice focuses on financings and mergers and acquisitions, including private equity, venture capital, and general corporate transactions.