Coronavirus Small Business Relief: SBA Loans

By Ben Geier, CEPF®

As the COVID-19 pandemic continues to grow, many small businesses are finding themselves asking some tough questions about how to continue operations while making sure they’ll be able to sustain themselves throughout the crisis. Though there are a number of business relief programs currently under consideration at the municipal, state and federal levels — including the CARES Act recently signed into law by President Donald Trump — small business owners may still be wondering what exactly they can do to make sure the coronavirus crisis doesn’t spell disaster for their livelihoods. SBA 7(a) loans from the Small Business Administration have emerged as an attractive option.

As small business owners navigate the coronavirus recession and determine whether an SBA 7(a) is right for them, they may also do well do enlist the help of a trusted financial advisor — many of whom work with both small businesses and individuals — can be a help when navigating difficult times like now.

The Small Business Administration’s 7(a) loans are available for up to $5 million for small businesses in the U.S., including all U.S. territories. The SBA lists the following as possible uses of capital from a SBA 7(a) loan:

• Working capital
• Expansion/renovation
• New construction
• Purchase of land or buildings
• Purchase of equipment or fixtures
• Lease-hold improvements
• Refinancing debt for compelling reasons
• Seasonal line of credit
• Inventory
• Starting a business

It is important to note that the Small Business Administration is not a lender itself. The government agency does not provide loans to small businesses or serve as a bank. Instead, the SBA works to make it easier for lenders and small businesses to connect and provides a guarantee to loans so that lenders have less risk.

Guaranteeing a loan for a small business works the same way it does when an individual uses a guarantor to buy a car or rent an apartment — in the event the borrower is unable to pay back the loan, the guarantor is on the hook to repay the lender.

To get a 7(a) loan, you’ll need to find a lender who is registered with the SBA and willing to lend money to your business under the 7(a) program. More information on how to find one of these lenders is below.

The recently passed coronavirus stimulus bill includes a $350 billion fund for loans to small businesses which will be available through the same banks that currently participate in the SBA 7(a) program. This plan is called the Paycheck Protection Program. Crucially, these loans will have additional uses than those already provided for in the 7(a) program.

This includes getting a loan to pay rent, fulfill insurance premiums or, perhaps most notably, pay staff or rehire staff that the business had to lay off as a result of the pandemic. Some portion of these loans are forgivable by the government, based on a variety of factors including payroll cost and the number of employees.

Another key difference between these loans and normal 7(a) loans is that these loans are 100% guaranteed by the government. That means that lenders can be more flexible than they normally would, said Mike Knotts, the senior vice president of government guaranteed lending at Blue Ridge Bank, which operates in Virginia and North Carolina.

“That puts [the enhanced 7(a) loan] in a good position to help others,” he said. Knotts added that it’s also much simpler to apply for these loans than normal 7(a) loans, with less documentation needed and no collateral required.

“They’re going to be great for small businesses out there to basically keep payroll going,” Knotts said.

Loans under the Paycheck Protection Program are available for up to $10 million or 2.5 times a firm’s monthly payroll expenses.

Outside of the loans for businesses impacted by COVID-19, there are a variety of types of loans available under the 7(a) program. The most common is the standard 7(a) loan. These loans can be for up to $5 million and are guaranteed by the SBA at 85% for loans up to $150,000 and at 75% for loans greater than $150,000. The lender and borrower negotiate the interest rate, but it cannot exceed the SBA maximum interest rate, currently set at 4.25% for prime borrowers using the 7(a) program. The SBA determines eligibility is and generally makes decisions in five to 10 business days.

The 7(a) small loan has similar parameters to the standard 7(a) program, but it is only for loans of up to $350,000. Ths SBA Express loan is for loans of up to $350,000 and has an expedited turnaround time of just 36 hours. As a tradeoff, though, the SBA only guarantees the loan at 50%, meaning the lender is taking more risk. The lender makes the decision about whether or not to approve SBA Express Loans.

There are a number of other types of loans available under the 7(a) banner as well, including loans specifically for exporters and businesses taking part in international trade.

The majority of businesses in the United States are eligible to apply for loans under the SBA 7(a) program. The only eligibility requirements are as follows:

• Operate for profit
• Do business in the U.S. or its territories
• Have reasonable owner equity to invest
• Use alternative financial resources including personal assets before seeking financial assistance

There are a few other stipulations. Franchises, for example, are eligible for the loans unless the franchisor retains a certain amount of power to control operations. Recreation facilities and clubs are eligible as long as they are generally open to the public or have nonrestrictive membership. Farms and fishing businesses are eligible, but they must first explore more targeted funding sources.

While application requirements have been relaxed for loans related to COVID-19, these are the steps for applying for a 7(a) loan at other times:

1. Fill out the SBA Loan Application
2. Complete a statement of personal history and a personal financial statement
3. Prepare and include a profit and loss statement (P&L) and projected financial statements
4. Prepare and include a list of names and addresses of any subsidiaries and affiliates.
5. Attach business license
6. Include past loan applications
7. Include signed personal and business tax returns for the previous three years
8. Prepare and include resumes for each principal
9. Write a brief history of the business
10. Include a copy of your business lease or a note from your landlord

Once all of this is done, you can go about finding a possible lender for your 7(a) loan. SBA has a lender match tool that will help you connect with a lender that gives 7(a) loans.

If a 7(a) loan doesn’t work for your business for any reason, there are a number of other options available to you.

The first are Disaster Assistance loans. These are available for up to $2 million to temporarily assist a business that has been impacted substantially by the current crisis. These loans are available in any state or territory where an economic disaster has been declared. Small business owners should examine their business interruption insurance coverage.

There are also a number of state and local programs available that may be able to offer grants or loans to businesses that are negatively affected by the COVID-19 pandemic.

The Small Business Association’s 7(a) loans offer guaranteed loans to small businesses for up to $5 million. The recently passed stimulus package related to the COVID-19 pandemic provides for loans offered through the 7(a) framework guaranteed at 100% by the government and with minimal paperwork. Additionally, there are a number of other programs both federally and locally that can help small businesses through this difficult time period.

• A financial advisor can help with both your small business and your personal finances. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
• If you’re just starting a small business, make sure you choose the right business structure, taking things like taxes into account.
• Don’t forget about yourself. Use our coronavirus stimulus check calculator to see if you qualify for government money.

Photo credit: ©iStock.com/jacoblund, ©iStock.com/Ridofranz, ©iStock.com/skynesher

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