Small Business Update: A Financial Tool for Obtaining Liquidity

Posted By Pedro Gonzalez, CPA on Mar 24, 2020 |


These are unprecedented times in our economy. We continue to track the evolving landscape of financial programs offered to small businesses disrupted by the coronavirus (COVID-19). 

The U.S. Small Business Administration (“SBA”) is offering loans through additional funding provided by the Coronavirus Preparedness and Response Supplemental Appropriations Act recently signed by President Donald Trump.

 

SBA Disaster Loans as a Tool for Obtaining Liquidity

 

An additional source of Coronavirus-related relief is being provided by the U.S. Small Business Administration (SBA) in the form of Economic Injury Disaster Loans (EIDLs). These loans consist of working capital provided to small businesses to meet their ordinary and necessary financial obligations that cannot be met as a result of the COVID-19 disaster.

We are here to help you evaluate whether the program may be an option for you to help meet your liquidity needs and to understand the various related requirements. 

 

SBA Economic Injury Disaster Loans

 

The U.S. Small Business Administration (SBA) provides Economic Injury Disaster Loans (EIDLs) to provide working capital to small businesses to meet their ordinary and necessary financial obligations that cannot be met as a result of a disaster. 

Coronavirus (COVID-19) has been classified as such a disaster.  A full list of states and counties that qualify for an EIDL under the COVID-19 declared disaster can be found at https://disasterloan.sba.gov/ela/Declarations/Index.  A business must meet the SBA’s small business size standard which is set by industry, based on NAICS code.  For some industries, the size standard is based on revenue and for some industries it is based on number of employees.

Note: The program is continuing to evolve and this report reflects the information available as of March 24, 2020.

As your business advisors, we are here to help. Together, we will get through these uncertain times.

 

Key Features of Small Business Administration Disaster Loans

 

  • Small Business– Any company with less than 500 employees is considered a small business by the SBA which will allow them to apply for Economic Injury Disaster Loan assistance.
  • Physical Damages– As a business of any size, up to $2 million for physical damages.
  • Expected Terms– Loans up to $2 million, 3.75% rate (2.75% for nonprofits), maximum term 30 years (determined on a case by case basis)
  • Deferment on Principal – Potential for a 1-year deferment on principal. Legislation currently pending in the US Senate may affect deferment or allow for loan forgiveness under certain circumstances.
  • Allocation of funds– These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact.
    • The SBA will determine the term of the loan based on the applicant’s financial condition, with a maximum term of 30 years.  Loan proceeds may not be used to refinance an existing long-term debt of the borrower.
    • Borrowers must demonstrate that they do not have other credit available, including from the owners of the business.  The SBA may also require a personal guarantee from all general partners or managing members and any partner or member who owns 20% or more of the applicant business.  The SBA may require the personal guarantee to be secured with real estate (i.e. a residence) if the applicant business is unable to provide adequate security.
    • In prior years, the SBA has required a letter from a bank declining financing. This does not seem to be required currently. Cash flow projections do not appear to be needed for this program – instead, the historical operating expenses of the company appear to dictate the amount that may ultimately be funded.
    • Although a loan application will not be declined solely for a lack of collateral, the SBA requires collateral available to the borrower to be pledged for all EIDLs in excess of $25,000.  A borrower’s credit history and ability to repay the loan will be considered in the SBA’s decision to offer an EIDL.
    • In the case of the coronavirus, the loans will not be used to fund uninsured property damage as was the case with other disasters such as Katrina, but instead will be used to fund losses and working capital needs incurred as a result of the coronavirus. We believe that SBA Form 1368will be a key form that will be used to support the extent of financing requested from SBA, as it requires information on gross sales for each month during the previous three years.

 

Application Process for SBA Disaster Loans

 

Decisions on loans are made on a case-by-case basis and are determined by revenue lost due to the coronavirus and ability to repay the loan.  The loan is intended to be used to help businesses to get back to where they were before the disaster and not for improvement or expansion.  Proof of need for the loan is determined by the SBA Disaster Loan officer after the application is submitted.  Selection for the loan is on a first come, first serve basis. It is recommended by the SBA that applications be submitted as quickly as possible.

There are guidelines specifying if a business is qualified as a small business to apply for an SBA loan.  Small business qualification varies by industry NAICS codes and is determined by revenue or number of employees.

For help in determining your small business industry NAICS code, please visit:

https://www.ecfr.gov/cgi-bin/text-idx?SID=b919ec8f32159d9edaaa36a7eaf6b695&mc=true&node=pt13.1.121&rgn=div5#se13.1.121_1201

A business can determine if they qualify as a small business using their NAICS code by visiting https://www.sba.gov/size-standards/.

Information needed to apply for a SBA Disaster Loan is similar to applying for a bank loan.

Documentation includes:

  1. IRS Form 4506T, completed and signed by each applicant business, each principal owning 20% or more of the applicant business, each general partner or managing member, and any owner who has greater than 50% ownership in an affiliate business.
  2. Complete copies of the applicant’s most recent Federal income tax return.
  3. Personal financial statement (SBA Form 413) completed by the applicant business, each principal owning 20% or more of the applicant business, and each general partner or managing member.
  4. Schedule of Liabilities (SBA Form 2202) listing all fixed debts.

In addition, if your 2019 Federal income tax return has not yet been filed, you may be asked to provide a year-end profit and loss statement and balance sheet for 2019.  You may also be asked to provide a current year-to-date profit and loss statement and/or monthly sales figures (SBA Form 1368).

Do not wait until settlement of any related insurance claims to apply for an EIDL.  The loan amount can be adjusted after insurance proceeds or other recoveries are received.

See the SBA Disaster Relief Loan Guide for specifics about the program. 

Anchin can help business owners with the following in addition to other questions you may have:

  1. Preparation of the loan application;
  2. Preparation of personal financial statements; and
  3. Calculation of your working capital needs that are eligible for an EIDL.

For assistance with filing for an SBA Economic Injury Disaster Loan or to determine whether your organization qualifies, contact us at 954-616-899 or pedro@pedrocpa.com today.