The Coronavirus containment efforts have put a lot of small businesses in a very difficult situation. Some businesses have been forced to shut down altogether, while other businesses are working at a reduced capacity. To help, Congress recently released billions of dollars to be used by the SBA to fund loans to small businesses. In this article we are going to review:
- Loan limits for SBA Disaster Loans
- Duration of SBA Disaster Loans
- How SBA Disaster Loans differ from traditional SBA Loans
- How long does it take to get an SBA loan
- The interest rate on SBA loans
- Collateral requirements for SBA Disaster Loans
- Other lending programs available to small businesses
Quick Overview of SBA Loans
For individuals that are new to SBA Loans just a quick note, the SBA can either lend money directly to businesses or it can require a bank to issue the loans. When the banks issue the loans, the SBA serve as a guarantor for those loan, if the borrower defaults on the loan, the bank gets reimbursed by the SBA for the amount of the default.
There are SBA loans like the “Economic Injury Disaster Loan” that was just made available by Congress that is issued directly from the SBA. It requires a completion of an online application, submission of documentation to the SBA, and then the loan is either approved or denied by the SBA.
SBA Disaster Loan Limits
The SBA Disaster Loan Program provides loans to businesses up to $2 million dollars. Businesses of course, can take loans for less than that amount.
Interest Rate For SBA Disaster Loans
By law, SBA Disaster Loans have to be issued with an interest rate under 4% which is much lower than the interest charged for traditional SBA loans.
Duration of SBA Disaster Loans
The SBA Disaster Loans can be amortized up to a maximum of 30 years. The option to amortize the loan over 30 years provide small businesses with access to capital with lower monthly payments.
Collateral for SBA Disaster Loans
For SBA Disaster Loans, collateral is typically required for loans over $25,000. Due to the unprecedented nature of the Coronavirus crisis, this collateral requirement has been waived. However, a business must pledge collateral to the extent that it is available. The CARES Act also waived the personal guarantee requirement for loans under $200,000.
How Long Does It Take To Get An SBA Loan?
So what’s the turnaround time on an SBA loan? You have to act quickly. Given the high demand for these loans, the banks and SBA are most likely going to be overwhelmed with SBA loan applications. Even though this money has been made available to small businesses, the loans can only be issued as quickly as they can be processed. If you do not start the application now, it may be months before you actually receive the cash for the loan. Unfortunately, some business will not be able to wait that long before closing their doors so it’s important to start the process now.
SBA Disaster Loans between $350,000 and $1M will be considered “SBA Express Loans” and can often be issued within 30 days of the application but the ability to issue the loan within that window will greatly depend on how quickly you can submit the required documents to the bank to complete the underwriting process. The bank or SBA is going to request:
- Complete Business Loan Application
- Form P-019: Economic Injury Disaster Loan Supporting Information
- IRS Form 4506-T: Request for Transcript of Tax Return
- List of all the owners of the business and the percentage of their ownership
- Most recent tax return for the business
- SBA Form 413: Personal financial statement (for each 20%+ owner of the business)
- SBA Form 2202: Schedule of liabilities listing all fixed debts
- Personal tax returns for each 20%+ owner
- Most recent profit & loss statement and balance sheet for the business
- Current YTD profit / loss statement
They may require some additional documentation but these are the most common items.
SBA Disaster Loan Underwriting Process
Getting an SBA loan is not guaranteed by any means. Banks and SBA look at three main items: Cash, Credit, and Collateral. One of the main differences between traditional SBA loans and Disaster SBA loans, is that Disaster Loans have more lax unwriting requirements. While a traditional SBA loans may require all three cash, credit, and collateral to be strong, a disaster loan may only require one of those three items to be in a strong position.
It is very important to apply for the SBA Disaster Loan sooner rather than later based on the cash position of the business. You want to apply for the loan while the cash position of the business is still in decent shape, it increases your chances of being approved. If the business begins taking losses or revenue has stopped entirely, it will be much more difficult to get approved for the SBA Disaster Loan.
Even if your business does not need the money now, it may make sense to apply for the loan, and just keep the cash in the business checking account in case the business needs that capital a few months from now, it’s cheap capital. There are no loan origination fees charged to the borrower to apply for these SBA Disaster Loans and with an interest rate of 3.75%, if the business takes out a loan for $300,000, it’s only costing the business $750 per month in interest expense to have that cash on hand.
The CARES Act includes an emergency grant in the amount of $10,000 to any small business or nonprofit that applies for the Economic Injury Disaster Program. When the business owner applies for this SBA Disaster loan, they can request for the grant amount to be advanced within 3 days of submitting the loan application. There are restrictions as to what the grant money can be used for such as payroll, paying a mortgage or rent, and other expenses specifically outlines by the EIDL.
Other Business Loan Programs
As a result of the Coronavirus stimulus package, there are a number of other lending programs available to small businesses besides the SBA Disaster Loan Program. Some individual states have developed their own lending programs to give small businesses access to interest free loans quickly. There is also the new Paycheck Protection Loan Program associated with the CARES Act that was recently passed, these loans have a loan forgiveness feature associated with them if certain terms are met. The terms of these other loan programs may end up being more favorable than the SBA Disaster Loan Program but it will have to be assessed on a case by case basis.
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.