Local small business has been, and will be, greatly impacted by the COVID-19 outbreak stemming from the SARS-CoV-2 virus. During these uncertain and precarious times, it is important for businesses to know the resources available to defray the effects of closures and “shelter in place” orders. An Economic Injury Disaster Loan (“Disaster Loan”) through the United States Small Business Administration (“SBA”) is just one of those resources. This blog post will explain what a Disaster Loan is, how to apply for one, and what types of requirements are necessary to obtain this type of loan.
What is a Disaster Loan?
Disaster Loans are serviced by the SBA and are the primary form of Federal assistance for private-sector, including non-profit, disaster losses. While this program does primarily service small business, it is available to large employers that meet the requirements. Applicants can request Disaster Loans up to two million ($2,000,000) dollars which will carry interest rates below four (4%) percent.
The Disaster Loans are working capital loans to assists private-sector businesses with cash flow difficulties due to certain economic disasters. While these loans are most often associated with property damage due to a natural disaster, the SBA has made these Disaster Loans available to businesses directly affected by the COVID-19 outbreak.
Currently, Disaster Loans are available to California businesses in all counties regardless of whether a county has declared a public emergency due to COVID-19. Businesses who apply for, and receive loan funds under the Disaster Loans program may use the loan proceeds to cover fixed debts, payroll obligations, accounts payable, and other bills and debts incurred as a result of the COVID-19 outbreak. The Disaster Loans intent to assist in the day to day operations of the business. Businesses should be aware that loan proceeds may not be used to pay off or refinance other debt obligations of the business.
Is my Business Eligible? How can my Business Apply for a Disaster Loan?
Before applying for a Disaster Loan, businesses should make sure that they are eligible to do so. A business must be able to show:
- an economic hardship as a result of COVID-19;
- that they are not in default of any other SBA loan or Federal obligation (e.g. unpaid taxes, student loans, etc.);
- that the loan will not be used to refinance long term debt, and;
- the applicant is be able to meet any applicable insurance requirements (e.g. flood hazard insurance).
To apply for a Disaster Loan, a business will need to register and file an application through the SBA website at https://disasterloan.sba.gov/ela/.
When assessing the application, the SBA will look to three things to determine whether to fund the loan:
- the ability of an applicant to pass a credit check;
- an assessment of an applicant’s ability to repay the loan; and
- whether sufficient collateral is available for loans in excess of twenty five thousand ($25,000) dollars.
While the SBA will not deny a loan because of a lack of collateral, they will require all collateral available in order to underwrite the loan. The SBA may also require personal guarantees from the principles in the event of non-payment.
What Information Will my Business be Required to Provide?
The application required by the SBA should be provided electronically. While there is guidance on the SBA site that indicates a paper submission can be made, there is no indication of how this can be done. As such, the SBA is strongly encouraging all applicants to file electronically.
The application itself will require a great deal of information from the business, and may include additional requests from the loan officer, depending on the applicant’s specific situation. Information that a business should be expected to provide includes:
- Individual contact information for all applicants;
- Social Security Numbers for all applicants;
- FEMA Registration number if the disaster is associated with property damage due to natural disaster;
- Deed or lease information for any real property that the business owns or operates out of;
- Business insurance information;
- Business financials, including monthly income statements, profit and lost sheets and other financial information as requested;
- The business’ Employee Identification Number;
- A completed SBA Business Loan application (SBA Form 5);
- Internal Revenue Service Form 4506-T;
- Copies of the business’ tax returns and associated schedules, including the most recent return. If the most recent return has not yet been filed, a year-end financial statement will need to be provided;
- An SBA Personal Financial Statement (SBA Form 413);
- A schedule of liabilities, including fixed debts (SBA Form 2202);
- A current year to date profit and loss statement; and
- Additional filing requirements as requested by the SBA (SBA Form 1368)
Businesses should also be expected to provide current forecasts and projections for both sales and expenses as far out as possible. Additionally, a business should provide any documentation showing an actual negative economic impact as a result of COVID-19.
Other Considerations and Things to Remember
When applying for a Disaster Loan, a business may request deferment of any other SBA, or non-SBA, loans. Though, businesses should be aware of any accelerated or increased deferment payments that they may be subject to once the deferred loan becomes due and payable.
There is still a great deal of uncertainty surrounding the full impact that the COVID-19 outbreak will have locally, nationally and across the globe. Projecting and forecasting sales and expenses, and any related COVID-19 economic impacts could be extremely difficult. It is important for businesses to remember that ultimately the Disaster Loan does come with repayment requirements and legal obligations. When applying for a Disaster Loan, businesses would be wise to consult their professional financial and legal advisors, executive management or board of directors prior to beginning this process.
For businesses with questions for the SBA regarding Disaster Loans, the SBA can be reached at:
Please be aware that during a disaster period, individuals calling the SBA may experience significant wait times and it may be more efficient to email any requests or questions.
The attorney’s at Carmel and Naccasha are experienced advisors and partners – helping businesses navigate the world, both in good and bad times. If you have any questions about this blog post or any business legal needs please do not hesitate to contact us. We support our community and the businesses that support it. We love this beautiful place that we are fortunate to call home. If we can help in anyway, please let us know. Please stay safe and healthy.
Additional resources for businesses impacted by COVID-19: