The U.S. Small Business Administration (“SBA”) offers loans to businesses and homeowners that have been economically impacted by CoVID-10, the coronavirus. For many small businesses and individuals, the SBA loan application process can be a struggle. This article covers the terms you can expect on an SBA loan, eligibility for SBA disaster loans related to coronavirus impact, and the process for applying for an SBA emergency loan.
SBA Disaster Loans Offer Good Terms
The SBA is currently required to offer loans to qualifying individuals or businesses at a maximum interest rate of 4% for the purpose of assisting businesses to survive a disaster and resume normal operations. The loans can be up to $2 million, but loans under $500,000 are being fast-tracked for approval. Depending on your ability to repay the loan, the SBA may offer a repayment term of up to 30 years. The exact terms you are offered depends on a number of factors including the actual amount of economic injury, your business needs, ability to repay, business revenue, physical assets, and the financial capacity of principals, such as members of an LLC or general partners in a partnership. However, credit problems should not keep you from applying. You may wish to consult a professional, such as a lawyer or accountant to assist you, if you have concerns.
SBA Disaster loans:
- Are capped at 4% annual interest
- May be for up to $2 million (this limit may be waived for large employers)
- Are fast-tracked for loans under $500,00
- May allow up to 30 years to repay
- Do not require physical damage, but are available only in declared disaster areas
SBA Disaster Loan Eligibility Requirements
There are two types of SBA loans that are particularly important now. First, Economic Injury Disaster Loans (“EIDLs”) are for businesses that have suffered economic problems due to a declared disaster, even without physical damage. Second, businesses that have suffered economic harm because an employee has been called up for active duty in the military reserves may apply for a Military Reservist Economic Injury Disaster Loan (“MREIDL”). The terms of both loans are similar but there are differences.
You may be eligible for an EIDL if your business:
- Is a small business,
- Small agricultural cooperative, or
- Has suffered a COVID-19 related economic loss
- Is located in a declared disaster area
Your business may be eligible for an MREIDL if:
- a small business
- with one or more employees who have been called to active duty in the U.S. military reserves
- the missing employee(s) are essential to your business
- is unable to meet necessary and ordinary business expense because of losing the employee(s)
- the actual economic loss is not covered fully by insurance
Restrictions on SBA Disaster Loans
There are some restrictions on SBA Disaster loans that affect their amount and use. An accountant with experience in SBA loans can help and we recommend that you consult one. SBA loan proceeds cannot be used for personal expenses, only business expenses. SBA loan money should not be transferred between business entities unless in payment of a legitimate business expense. Additionally, lying on SBA loans may cause civil and criminal liability, as can misappropriation of SBA funds.
MREIDLs are capped at $50,000, unless your business can offer collateral, such as real estate, to secure the debt. MREIDLs are also limited to actual economic damages and to damages that are not covered by insurance. Further, MREDL proceeds may not be used to replace lost profits or income, only the losses incurred because of the lost employee(s). For example, you may not use MREIDL funds to expand your business or pay off other debt. Businesses that obtain SBA funds through either type of disaster loan should take precautions to trace the use of their funds and ensure those funds are applied correctly.
How To Apply For SBA Disaster Loans
The process is relatively straightforward for most small businesses, however, you should prepare before filling out an application. Unsurprisingly, the SBA application website is suffering long delays and has crashed repeatedly. You may want to wait until after 7 PM or 8 PM to access the online application. Paper applications will take longer to process, but if you cannot access the website they are available here. For more complicated businesses or for those who lack the appropriate materials, a lawyer and/or accountant may be able to help.
The following items are needed to apply for SBA Disaster Loans, NOT INCLUDING NONPROFITS:
- the Application, unless completed online
- Tax Information Authorization (IRS Form 4506T) for each general partner, managing member, or principal owning 20% or more of the business and for each general partner, managing member, or any owner who has greater than 50% in an affiliate business
- Complete copies, including schedules, of the most recent tax return for the applicant business or an explanation for why the return is unavailable
- Personal Financial Statements (SBA Form 413) for the applicant, each principal owning 20% or more of the business, and each general partner or managing member
- Schedule of Liabilities listing all fixed debts (see SBA Form 2202)
- Additional information, if requested, such as profit-and-loss statements and monthly sales figures
For an MREIDL, you will need:
- A copy of the employee(s) notice of expected call up, official call up orders, or release discharge from active duty
- Written explanation and a financial estimate of each covered employee’s loss will cause economic injury to your business and the steps your business is taking to mitigate the losses
- MREIDL Certification Form P-0002, including the employee’s concurrence with the request and a certification that the employee will be rehired in the same or a similar job once returned from active duty
Nonprofits are required to submit:
- An Application
- Most recent tax return or a copy of the organization’s IRS tax-exempt certification and complete copies of the last three year’s “Statements of Activities”
- Schedule of Liabilities (see SBA Form 2202)
- Tax Information Authorization (IRS Form 4506-T) for the applicant organization AND all affiliates
Getting Help With Your SBA Disaster Loan Application
Many businesses and nonprofit organizations will not need assistance preparing their application. When assistance is needed or desired, various professionals can help. Accountants are useful to help prepare profit-and-loss statements quickly or file delinquent returns. Attorneys may assist with preparing the application and giving legal advice related to your business. The San Antonio lawyers at Hoelscher Gebbia Cepeda PLLC are honored to assist the business community and may be contacted at 210-222-9132 or through our contact form.