Update: What Small Businesses Need to Know in a COVID-19 Shutdown

By: Donald F. Kratz

As the government works on a plan to help small businesses through the COVID-19 shutdown, below are important updates as we know now.  There are two programs being proposed, they are:

Program #1: CARES Act (Coronavirus Aid, Relief, and Economic Security)

As of today, the Senate passed the CARES Act unanimously.  The next role is that of the House.  If they concur with the Senate version, upon passage by the House, it will go to the President for signature.  If the House wants to amend anything in the bill, the House will pass its version and the bills will be reconciled in Conference Committee.  

Once the CARES Act is signed by the President, the SBA may need up to a month to implement the changes.  Currently, the latest version of the CARES Act includes the following for SBA’s:

  • Nearly $300 billion in SBA 7(a) loan authority.
  • Increases SBA 7(a) maximum loan size from a $5 million to $10 million loan and $1 million maximum for SBA Express.
  • A 100% government guaranty on the full balance as opposed to the current 75% guaranty on the loan balance.
  • All Lenders approved by the SBA to make 7(a) loans will be delegated authority to make and approve loans based on an evaluation of the eligibility of the borrower.
  • Eligibility includes a business and/or nonprofit which employs less than 500 employees.
  • Funds may be used for payroll support, employee salaries, mortgage payments, rent, utilities, and debt obligations incurred before the covered period.  

The proposed legislation also notes that if the bill is enacted, SBA Administrator, Jovita Carranza, has 30 days to advise lenders of fee waivers and provide guidance on deferments.

Application for this program will be through normal bank channels. In effect it is an extension of the 7(a) program.

Program #2 – Economic Injury Disaster Loan (EIDL)

The SBA’s Economic Injury Disaster Loan program provides low-interest loans of up to $2 million to small businesses and private non-profits affected by the Coronavirus pandemic. These working capital loans can be used to meet needs including payroll, accounts payable, and fixed debt payments until the situation improves. They have repayment options of up to 30 years. Interest rates are 3.75% for small businesses and 2.75% for private non-profits. Loans will have a deferred payment of one year from the date of note.  Small business owners can apply now at: https://disasterloan.sba.gov/

According to the banking lobby, Congress may give this program over to the banks.  The reasons for this movement are because there have been too many challenges with SBA controlling the disaster capital flow:

  • SBA cannot handle a disaster of this magnitude: Typically, SBA’s disaster relief program addresses localized disasters such as a tornado. The scale of this calamity is too much for SBA to handle.
  • Businesses are complaining about SBA’s Disaster application: We consistently hear complaints such as, “the application couldn’t handle my multiple entities;” “the system couldn’t find me;” and “the application froze.”
  • No transparency: Applicants have no visibility into: a) if they qualify for the program; b) when their application will be reviewed; and c) when funds will be disbursed if approved.

As for now, borrowers can apply to one program or the other but not both.  However, the details are still in the works and a bit of a moving target….

The proposed legislation similarly notes that if the bill is enacted, SBA Administrator, Jovita Carranza, has 30 days to advise lenders of fee waivers and provide guidance on deferments.