DATE: March 24, 2020
TO: Kane Kessler, P.C. Clients
FROM: Kane Kessler, P.C. Corporate Department
RE: SBA Loans for Companies Affected by the COVID-19 Crisis
In response to the COVID-19 crisis, the United States Small Business Administration (“SBA”) is offering an Economic Injury Disaster Loan assistance program to provide working capital to small businesses and nonprofits that are suffering substantial economic injury. These Economic Injury Disaster Relief loans are different from normal SBA loan programs in that they are direct loans from the SBA rather than SBA-guaranteed loans through lenders.
To help alleviate economic injury, companies located in the declared disaster areas can apply for disaster-assistance loans of up to $2 million. These loans are meant to replace short-term lost revenue, and can be used to pay fixed debt, payroll, accounts payable and other bills that cannot be paid because of the impact of the COVID-19 crisis. The loans are offered with long-term repayments in order to keep payments affordable, up to a maximum of 30 years (dependent upon the borrower’s ability to repay), at interest rates of 3.75% for small businesses and 2.75% for nonprofits. Businesses with credit available elsewhere are not eligible.
SBA disaster loans historically have provided relief to make up for the damage that insurance and other grants do not cover. This type of loan should, therefore, not be the only source of funding. Businesses and private nonprofits that suffer economic damage to their business might qualify. Economic damage covered by these loans include damage due to extended closures and a reduction in business traffic. Applicants must meet several requirements to qualify for a loan including general requirements for financing like credit score, income, and collateral, in addition to certain SBA disaster loan-specific requirements. The loans are available to nonprofits and small businesses that meet the SBA’s definition of small business, which can be found at https://www.sba.gov/federal-contracting/contracting-guide/size-standards.
A common reason for the SBA declining an application is a poor credit history. This includes a low credit score and unsatisfactory performance on prior SBA loans or other federal obligations like student loans. Another common reason is an inability to repay debt with a cushion. Generally, 1.25 times or better debt service coverage ratio (DSCR) is acceptable.
Qualified applicants for the SBA Economic Injury Disaster loan program are encouraged to apply online at: https://disasterloan.sba.gov/ela/.
In addition to the steps above, the Federal Reserve expects to soon announce the establishment of a “Main Street Business Lending Program” to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA. There may also be an expansion of SBA loan programs under fiscal stimulus that is expected to be signed soon which may alter the applicability of the information set forth above.
For additional information about the SBA’s Economic Injury Disaster loan assistance program, please feel free to reach out to Robert Lawrence (at 212 519 5103, rlawrence@kanekessler.com), Steven Cohen (at 212 519 5115, scohen@kanekessler.com), Michael Wu (at 212 519 5165, mwu@kanekessler.com) or any partner in our Corporate Department.