Williams Teusink is a small business; many of our clients are small businesses. And as current and potential impact of COVID-19 on small businesses becomes clearer, we are asking ourselves the same question our small business clients are asking us: How do we make the right decision for our business in this moment of great uncertainty? We have committed to our employees that we will do everything we can to protect their jobs. Some of our clients, especially those in the hospitality industry, don’t have that luxury.
The U.S. Small Business Association, more commonly known has the SBA, mission is to “aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.” In order to preserve as many American jobs as possible in the face of COVID-19, the SBA is making disaster loans available to certain businesses.
At this time, our analysis of the options available under the 7(a) Program is based upon a draft of the CARES Act which is currently being debated in Congress. This information is as accurate as possible at the time of publication. The only absolute certainty, right now, is that things will change and we will continue to provide updates like this one as quickly as practicable.
SBA Disaster Relief Loans
SBA Disaster Loans are low-interest loans made to business located in an area affected by different types of disasters. In this case, an “area affected by a disaster area” includes any state that has declared a State of Emergency as a result of COVID-19. Currently, nearly every state has made that statewide disaster declaration, including Georgia.
Here’s what we know about the Disaster Loans so far:
- They are available to any “small business” and that term is being very broadly defined.
- They are available to any small business which has suffered “substantial economic injury,” which is defined as being unable to (1) meet obligations as they mature, (2) pay ordinary and necessary operating expenses, and (3) market, produce, or provide a service or product ordinarily provided by the business.
- Qualifying businesses may borrow up to $2.0 million, but anything above $500,000.00 will require more thorough underwriting.
- The amount available to borrow will be calculated by multiplying a business’s gross profit, as stated on their most recent tax return, by 50%.
- Credit scores are an eligibility factor, but the scoring minimum is unknown.
- The repayment term will be 30 years, the first 12 months of which will be deferred with no payments.
- The interest rate for for-profit businesses set at 3.75%.
- There is no prepayment penalty.
The application for this loan program is now live. We do not know when loan approvals will begin. Loan approvals may have already begun for early applicants. It is our advice that if you believe you may require these funds that you apply now.
We went through the entire application process last night and have the following observations:
- Due to heavy usage, the loan application website lags during daytime hours and appears to work well late at night.
- You will need a thorough understanding of your corporate structure (ownership percentage, parent/subsidiary/affiliate entities, etc.) in order to complete your application.
- Businesses, their owners, and affiliates will all need to have a full accounting of their current debts to complete their application. This includes original debt amounts, current debt amounts, interest rates, debt origination dates, and debt maturity dates.
SBA 7(a) Loans
The 7(a) Loan Program is the SBA’s primary program for providing financial assistance to small businesses. A 7(a) Loan is typically issued by a bank lender with a guaranty from the SBA. The guaranty is provided to encourage private lenders to make loans to small businesses that might not otherwise qualify for a business loan.
The proposed CARES Act will increase the size of the 7(a) Loan Program and expedite its underwriting process. Additionally, Congress is considering a provision that would allow whatever portion of the Disaster Loan is used to pay up to 4 months of employee wages to be converted into a grant (i.e. free money).
Here’s what we know about the 7(a) Loan Program under the proposed CARES Act:
- It is available to any “small business concern,” which is very broadly defined. Most businesses with fewer than 500 employees should be eligible.
- Businesses may borrow up to $10 million.
- The amount available to borrow will be calculated by multiplying a business’s monthly payroll, rent, mortgage, and debt payments by 4. Again, the maximum is $10 million.
- We suspect the existing 7(a) Loan Program interest rates will still apply. Those rates are currently 6.50% and 11.25%.
- It may be used for payroll support, salaries, mortgage payments, rent payments, utilities, and other debt obligation payments.
- Lenders will have greater authority to approve loans without receipt of SBA approval.
- All loan fees will be waived to the maximum amount possible.
- Payments on all loans will be deferred for not less than 1 year.
- With some exclusions and limitations for highly paid employees, all loan proceeds put towards employee salaries in March, April, May, and June will be eligible for debt forgiveness.
- Laying-off employees in March, April, May, and June can reduce a business’ eligibility for aforementioned debt forgiveness.
Which program is best for our business?
A key provision of the 7(a) Loan Program within the CARES Act states that businesses who receive Disaster Loans are not eligible for the enhanced benefits of the 7(a) Loan Program . Therefore, businesses must make a quick cost-benefit analysis to determine which program best fits their needs.
The key advantages of the Disaster Loan are:
- A lower interest rate for funds not used for payroll.
- Greater flexibility in the use of funds.
- The potential for certain types of businesses to receive larger loans.
- Longer length of term, resulting in lower monthly payments.
The key advantages of the 7(a) Loan Program are:
- The opportunity to have significant portions of the loan forgiven.
- The potential for certain types of businesses to receive larger loans.
Our recommendation
At this time, we recommend businesses eligible for the disaster relief loans apply now. The volume of applications will be massive, and we do not know how quickly they can be processed. Additionally, the enhanced the 7(a) Loan Program is subject to change until it becomes law.
Assuming the proposed 7(a) Loan Program becomes law, businesses with significant payrolls, especially those in the service industry, should strongly consider applying. Complying with the terms of the program will enable such businesses to retain critical talent until the end of June, at little to no cost.
New information is constantly becoming available. The applicability and advantages of either loan will depend upon the applicant business. The best way to get current information is to contact us directly; our doors are closed, but we are working full time, answering calls, and checking email. Should you have further questions or concerns, please reach out. Williams Teusink will continue to monitor developments and provide updates as things change and, as we all know, they will.
