Small businesses were central in the negotiations of the over $2 trillion Coronavirus Aid, Relief and Economic Security ‘CARES’ Act, the largest economic emergency stimulus package in our nation’s history. The Small Business Administration (SBA) will have the authority to guarantee $349 billion in small business 7(a) loans, now called the Paycheck Protection Program, in addition to the revised Economic Injury Disaster Loan 7(b). It is important to look into each SBA loan and consider if either are a good fit for your SMB.
Will You Choose the Paychecks Protection Program Loan or Economic Injury Disaster Loan?
As the pandemic unfolds across the world the U.S. government is fighting back with the almighty dollar. And, though it may not seem like the time, now is the time to consider your loan options.
We have put together a side-by-side comparison of the Paychecks Protection Program loans and the Economic Injury Disaster Loan (EIDL) to help you make a well-informed decision.
If neither of these two coronavirus-related SBA loans for small businesses make financial sense for your SMB now, keep reading for other loan options to consider at the state and local level, as well as, corporate and nonprofit efforts to help small businesses through this crisis.
We are here to help with any questions that this information may bring up regarding your small business loan options.
SBA 7(a) — Paychecks Protection Program Loan
SBA 7(b) — Economic Injury Disaster Loan
|Company Size||No more than 500 employees; waives affiliation restrictions for restaurants and hospitality||Size standards (including subsidiaries and affiliates) according to industry (size varies by industry) apply|
|Company Type||For-profit and non-profit corporations||For-profit and non-profit corporations impacted by COVID-19 statewide are eligible. Certain industries (i.e. gambling, racetracks, etc.) are not eligible.|
|Creditworthiness||Not required to provide credit history or collateral||Credit history and ability to repay collateral required for loans over $25K|
|Available Credit||Not required to prove there are no other available credit sources||Required to prove there are no other available credit sources|
|Loan Period||February 15 to December 31, 2020||up to 30 years|
|Loan Amount||The lesser of (i) $10 million or (ii) the business’s average total monthly payroll costs* during the one-year period prior to the loan being made multiplied by 2.5.||Up to $2 million with $10,000 expedited advance|
|Loan Purpose||Payroll costs (salaries*, wages, tips, payments for sick leave, insurance premiums and state and local taxes assessed on the compensation of employees) mortgage, rent and utility payments, and interest on other debt obligations incurred prior to February 15, 2020||Keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments|
|Loan Payments||Payments deferred for 6 months||Repayment terms determined by ability to pay. – 3.75% interest rate for small businesses – 2.75% interest rate for non-profits|
|Fees||Both borrower and lender fees are waived||SBA processes and there are no fees|
|Loan Forgiveness||– Borrowers are eligible to apply for loan forgiveness equal to the amount spent in the 8 weeks after the loan closing date on payroll costs, interest on mortgages, payments of rent, and utility payments in place before February 15, 2020.
– The amount forgiven is reduced proportionally to the reduction in numbers of employees retained and reduction in employee’s pay beyond 25 percent (except for those making $100K or more) compared to the previous year. –
– Workers previously laid off between February 15 and April 1 shall not count against borrower’s loan forgiveness calculations so long as those employees are rehired by June 30, 2020.
|$10,000 advance that does not need to be paid back even if you are denied the loan|
*Except compensation to individual employees in excess of annual salary of $100,000, as prorated for the relevant period.
Note: This chart is for information only and businesses considering any SBA loan should consult the SBA directly at https://www.sba.gov/funding-programs/loans for details or updates as they occur.
Be prepared to apply for an SBA Loan
SBA loans have been a good choice for SMBs looking for lower loan rates, longer repayment terms, and a lower barrier to entry for borrowers with less than excellent credit scores and limited collateral. For SMBs impacted by the coronavirus (COVID-19), an SBA loan may be the best choice.
Here are a few things to keep in mind when applying for an SBA loan.
- SBA guaranteed loans range in size and purpose. Make sure you understand the restrictions on how to use the loan by type—7(a) loan, SBA microloan, export loan, CDC/504. Guidance for the Paychecks Protection Loan for lenders is forthcoming. You may still need to provide a plan for how you intend to use the loan in your application.
- Two critical changes to the Paychecks Protection Loans are that creditworthiness and collateral are no longer required to apply for assistance. Your personal credit score and credit report are typically used to determine creditworthiness. Be sure to review your credit report before you apply for an SBA loan.
- The application process is not quick. You will need to provide a good amount of information on your personal and business finances, plans for how you will spend the money, and several other documents that are reviewed by the SBA and the lender.
Stay up-to-date on SBA COVID-19 loan guidance for small businesses by bookmarking this page.
State and Local Loans
Lending through state and local coronavirus small business assistance programs is available, as of this writing, in the following cities and states:
- California SBDC COVID-19 Resources: City of Los Angeles Small Business Emergency Microloan Program
- Colorado: Denver Small Business Emergency Relief Fund
- Florida: Small Business Emergency Bridge Loan Program
- Illinois: On March 19, Chicago’s Mayor Lightfoot announced a $100 million public-private fund for Chicago’s small businesses affected by COVID-19.
- Michigan’s Small Business Relief Program will provide up to $20 million in small business grants and loans.
- New York: NYC Employee Retention Program, Small Business Continuity Fund, and Emergency Small Business Relief Fund
- Oregon: Beaverton Emergency Business Assistance Program and Hillsboro Small Business Emergency Relief Program, and Greater Portland Business Resources
Coronavirus Loans from Banks
Key measures, advocated for by the ADA and ICBA, were included in the CARES Act. Provisions such as increased support to SBA 7(a) program, coronavirus-related troubled debt restructuring relief, FDIC guaranteed bank debt, and others will be topics for the future.
If your business has been affected by coronavirus (COVID-19), check with your commercial bank or community bank’s website for their disaster assistance program.
Corporate Care for Coronavirus-Impacted SMBs
The business community’s care during this global pandemic is sparking hope through corporate relief programs offered by Amazon and Facebook and crowdfunding to keep small and medium-size businesses going.
Yelp Foundation and GoFundMe have teamed up to offer businesses a quick and easy way to crowdfund directly from the Yelp app; and will provide $1 million in matching funds for donations. This effort is an extension of GoFundMe’s Coronavirus Small Business Relief Initiative supported by Yelp and Intuit Quickbooks.
Alternative Loan Sources
Kiva is a nonprofit lender to borrowers in 80 countries around the world. Loans are typically backfilled by crowdsourced funds from lenders contributing a minimum of $25. Credit is extended to the approved borrower by field partners to provide funds before the 30-day fundraising period ends.
Have you considered your current customers as a cash flow source? If you are currently negotiating year-long contracts or are about to do so a discounted up-front payment can be a simple (no loan terms!) way to bring in much needed cash.
Pre-CARES Act, the SBA’s authorized lenders have all been banks and credit unions. Now, in this unprecedented time, fintech may be the next 7(a) lending group to help businesses get access to funds quickly. We’ll all have to wait and see.
The bottom line is that SMBs have loan options, and options are always a good thing to have.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. inDinero assumes no liability for actions taken in reliance upon the information contained herein.