The economic disruptions caused by the virus have had and will continue to have a disproportionate impact on U.S. small businesses and non-profit organizations. To combat some of these economic disruptions, the U.S. government has an array of credit options available to businesses in need of liquidity. We’ve outlined measures currently in place and the steps on how to take advantage of them.
Available as of 18 March 2020:
Economic Injury Disaster Loan Program
The government has currently apportioned $7 billion to SBA to begin mitigating the effects of COVID-19 in the form of Economic Injury Disaster Loans (EIDL). We expect an additional $50 billion to be made available to SBA to fund EIDLs in the coming weeks. EIDLs can provide up to $2 million in working capital to businesses demonstrating economic injury.
- To qualify, the business must (i) fit under the definition of a Small Business under the Small Business Act or be a qualifying non-profit organization and (ii) be located in a declared disaster area. SBA is working with state Governors to continuously identify new disaster areas. The definition of Small Business is determined based on industry classification (by NAICs code). Generally, manufacturing businesses with fewer than 500 employees and services businesses with less than $7.5 million annual receipts will qualify (though in certain industries the thresholds are much larger). In the future, the government may extend EIDLs to businesses that do not meet SBA’s definition of a Small Business.
- The interest rates for Small Businesses and qualifying non-profit organizations approved for EIDLs are 3.75 percent and 2.75 percent, respectively.
- The EIDL is a working capital loan to be used for payroll, fixed debts, and other bills that are unpayable because of the disaster’s impact. EIDLs cannot be used to repair, replace, or purchase physical assets and only businesses that are unable to obtain credit elsewhere can receive EIDLs. EIDLs do not replace lost sales or revenue.
- The term of these loans cannot exceed 30 years and are determined on a case-by-case basis. There are no upfront fees or early payment penalties charged by SBA.
- SBA aims to make decisions on each application within 21 days. After the request is approved, SBA will notify the applicant of documents that it needs to submit.
Standard SBA 7A Loan Guarantees
Under this popular loan guarantee program, SBA will guarantee between 75 percent and 85 percent of private loan amounts up to $5 million (up to $3.75 million maximum guaranty).
- To qualify, the business must fit under the definition of a Small Business under the Small Business Act.
- The maximum SBA guarantee percentages are 85 percent for loans up to $150,000 and 75 percent for loan amounts exceeding $150,000.
- The maximum allowable fixed interest rates as of 1 March 2020 are 12.75 percent for 7(a) loans of $25,000 or less; 11.75 percent for loans over $25,000 but not exceeding $50,000; 10.75 percent for loans over $50,000 up to and including $250,000; and 9.75 percent for loans greater than $250,000.
- 7(a) loan guarantee proceeds may be used to, among other things, establish a new business or assist in the operation, acquisition, or expansion of an existing business.
- The maximum term is 10 years, unless the loan finances or refinances real estate or equipment with a useful life exceeding 10 years.
- SBA aims to make decisions on each application 5-10 days after submission.
- To apply, the business must identify an SBA-approved lender and work through this lender on the paperwork required by SBA.
What’s Being Proposed and may become available in coming weeks:
Small Business Interruption Loans
The government has proposed setting aside $300 billion in the form of Small Business Interruption Loans (SBIL). The legislative purpose of SBILs is to combat the toll of the virus on employment and ensure continuity of employment through business interruptions. If approved, the U.S. government would provide a 100 percent guarantee on any qualifying SBIL.
- To qualify, the business must fit under the definition of a Small Business under the Small Business Act. This requirement may eventually be phased out.
- The maximum loan amounts businesses would be eligible for would be 100 percent of 6 weeks of payroll, capped at $1540 per week (per employee). This would amount to approximately $80,000 per employee on an annualized basis.
- Businesses utilizing SBILs must commit to sustaining employee compensation for 8 weeks from the date the loan is disbursed.
- The U.S. Treasury Department will be designated the authority to establish the appropriate interest rate, loan maturity, and other relevant terms and conditions.
To apply, the business must work through a U.S. financial institution on the requisite approval process. At this stage, the proposed format features a streamlined underwriting process comprised of two steps: (i) the lender verifying the previous 6-week payroll amount on the front end and (ii) at a later stage, the lender verifies that the borrower has paid 8 weeks of payroll from the date of disbursement.
Our Government Relations and Public Affairs practice
Our Government Relations and Public Affairs practice combines in-depth industry and regulatory knowledge with a unique understanding of the way government operates. We understand the link between legislative and regulatory bodies, and leverage our Global Regulatory knowledge to serve our clients. We learn our clients’ business and incorporate that knowledge into our strategic approach. We’ve been recognized as leaders in the field by Chambers, Legal 500, Legal Times’ Influence 50, Washingtonian’s Top Lobbyists, and The National Law Journal.
Authored by James M. Wickett, H.P. Goldfield, David A. Winter, Madelyn Healy, and Victor A. Ghazal
