*The original article posted on March 18, 2020 has been updated to reflect changes as of March 24, 2021. 

Many small businesses have been negatively impacted by COVID-19. The Small Business Administration (SBA) provides disaster loans to help businesses recover from declared disasters.

What is a small business?

Your industry may subject you to a different standard, but the general rule of thumb is that the SBA defines most small businesses as having less than 500 people. Following the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) this includes independent contractors, private non-profits, self-employed individuals, agriculture-related entities (but not farmers), cooperatives, ESOPs with fewer than 500 employees and tribal small business concerns from Jan. 31, 2020 to Dec. 31, 2020. A company’s average annual sales may also be used for the small business designation. In Indiana, over 99% of businesses are classified as small businesses. When in doubt, complete the application.

How do you qualify for an SBA Disaster Loan?

The first requirement is that your state’s governor sign a declaration that is then provided to the SBA administrator. Once it is processed, small businesses in that state will be eligible to apply for a disaster loan. All states, territories and the District of Columbia have signed such declarations as a result of the COVID–19 pandemic. Because of funding limitations, the SBA stopped accepting emergency loan applications from applicants other than agricultural-related entities. However, on June 15, 2020, the SBA once again began accepting emergency loan applications for all qualified small businesses and agricultural businesses.

What are the specifics about the SBA Disaster Loan program?

The maximum loan amount is $2 million and the maximum term is 30 years. The loan is not “free money” and does accrue interest at the rate of 3.75% for a for-profit business and 2.75% for a non-profit entity. Loans under $25,000 will not require collateral. Loans more than that will require collateral and that could be a third or higher lien position on real estate, such as a family home. A disaster loan will not be declined for a lack of collateral, but a borrower pledge is needed on whatever collateral is available. Additionally, loans under $200,000 will not require a personal guaranty. The loan will be limited to an amount the business needs and can afford to repay. These loans can be used to pay bills, including fixed debts due within the next 12 months, make payroll and meet current related business needs and expenses. There is no cost to apply for this loan, nor a requirement to take it once approved and offered. 

On March 15, 2021, the SBA announced that it will defer repayments of EIDL loans for 24 months for loans made in 2020, and 18 months for loans made in 2021, instead of the original 12 month deferral period. In addition, the SBA announced it is increasing the maximum amount small businesses and non-profits can borrow through the EIDL program. Starting the week of April 6, 2021, the SBA will raise the loan limit from six months of economic injury with a maximum loan amount of $150,000 to up to 24 months of economic injury with a maximum loan amount of $500,000. Borrowers do not need to contact the SBA regarding increases. Rather, the SBA will contact borrowers directly via email directing borrowers on how an increase can be obtained.

Who will not be approved for an SBA Disaster Loan?

There is a credit underwriting requirement to this loan. If the entity has bad credit, has defaulted on a prior SBA loan or the business has credit available through another source—a business line of credit, for example—the entity will not be eligible. If a borrower already has a disaster loan, the borrower may still be eligible for another loan based on the COVID–19 pandemic, but cannot consolidate the loans. 

How long will it take to get funds under this program?

It may take up to 48 hours for the SBA administrator to process a declaration of a disaster once received. In Indiana, Governor Eric Holcomb provided such a declaration to the SBA administrator on March 17, 2020. Loan applications are available here. Upon submission of a complete application, it can take 21-30 days to approve and another four business days for the funding to occur. However, the SBA has never dealt with the implementation of the disaster program on such a massive scale so expect delays. 

What can you do if you need funds now and cannot wait?

The CARES Act authorizes a grant of $1,000 per employee, up to $10,000, through the EIDL Disaster Grant program to disaster loan applicants, advanced within three days of receipt of the completed application and a self-verification of eligibility. You must self-certify you are an eligible entity prior to receiving the advance, but even if your application is not approved, you may keep the EIDL Disaster Grant. Additionally, you can contact any SBA partnering non-profit lender and request an SBA microloan of up to $50,000. Similarly, commercial lending partners may offer SBA express loans up to $1 million and/or SBA 7(a) loans up to $5 million. The 7(a) loans are typically processed within 30 days, while microloans and express loans are processed even more quickly.

What can I do if I cannot make payments on my current SBA loan?

The CARES Act authorizes the SBA to cover the next six months of payments on existing SBA loans, including principal, interest and fees, discussed in SBA Part Seven. You may also apply for a disaster loan or Paycheck Protection Program loan, discussed in SBA alerts Part Three, Part Four, Part Five, Part Six, Part Eight, Part Nine, Part Ten, Part Eleven, Part Twelve, Part Thirteen, Part Fourteen and Part Fifteen. Additionally, you should contact your bank and ask for a deferral. SBA loans that have been sold on the secondary market can be eligible for a  three month deferral on payment (banks have a one time unilateral right without investor consent to approve this). If the loan was retained by the lender, it is eligible for up to a six month or 20% of their loan amount deferral. The maturity date of the loan may also be extended up to the program date.

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