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COVID-19: FAQs on SBA Assistance to Small Businesses

UPDATE: This FAQ now includes information about the CARES Act.

Below are some general FAQs that are applicable under the current rules . The situation has been evolving rapidly, which makes it difficult to determine what form the relief will actually take. That said, the general sentiment in Washington is that the assistance should be offered to a broader group than the current framework; however, this is still undecided at this time.

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1. What is the CARES Act?

Q: What is the CARES Act?

On March 25, 2020, the United States Senate took the unprecedented step of approving the CARES Act, a 2 trillion dollar aid package to support US citizens and the US economy during the COVID-19 pandemic. We believe this bill will become law in a matter of hours and as part of the CARES Act, $350,000,000,000 will be available to small businesses through amendments to the act that governs the Small Business Administration.

Note, this is a general overview from solely a review of the CARES Act approved by the US Senate. As of this posting, the CARES Act is not officially law and it is possible that provisions of the law as passed by differ from the current bill.

Q: Who is eligible for the assistance?

Generally speaking, any business (including those meeting the definition of a “Tribal business concern”), nonprofit organization, or veterans organization that has 500 or fewer employees (subject to upward adjustment by the SBA depending on the applicable industry in which the business, nonprofit organization, or veterans organization operates).

Q: My business has several locations, has over 500 employees but not in one place, do we qualify?

Maybe. If your business is assigned a NAICS code beginning with 72, you are eligible. This code covers businesses in the “Accommodation and Food Services” only. Unfortunately, other businesses that do not fit this narrow criteria are not eligible.

Q: My company is VC-backed. Do I only have to count my employees or do the employees of other portfolio companies count?

Right now, the answer is nobody knows for sure. Under normal SBA review, the SBA is allowed to count the employees of all "affiliates" in determining the "size" of the applicant (number of employees is a factor in determining whether a business is an "eligible small business concern" for normal SBA lending)."Affiliation" is highly factual in nature and generally requires one party having control over another party (or the power to control). For example, if a VC fund owns more than 50% of your voting stock, you are likely an affiliate of the VC. Or, if you have granted board control or significant "veto" rights to a single investor, the SBA may deem that you are an affiliate to that investor. But, if any of your VC investors meet the definition of a "venture capital operating company" under U.S. Department of Labor regulations (see 29 CFR 2510.3-101(d)), then you are not considered an affiliate of those VC investors.

One concern is that the CARES Act specifically exempts from the affiliation rules certain accommodation and food service businesses, franchisees, and Small Business Investment Companies; meaning that Congress may be signaling that the typical "affiliation" rules apply for everyone else. Still, the language in the CARES Act for eligible borrowers appears broader than in the SBA Act, generally. We are awaiting more clarity on this issue and understand organizations like the NVCA are working to clarify this opaque question. (Companies that are deemed too large for Para. 36 Loans potentially would be eligible for loans from a separate $454B pool under the CARES Act earmarked for "medium sized" business; terms to be promulgated by the Federal Reserve at a later date.)

Q: How much can I borrow?

Under the CARES Act, if you are eligible, you can borrow the lesser of a.) $10,000,000.00; or b.) 2.5 times your average monthly “payroll costs” between February 15, 2019 and ending June 30, 2019** plus any other disaster relief loans received by the applicant from SBA on or after January 31, 2020 but before receipt of the loan applied for under the CARES Act. Note: “payroll costs” do not include any compensation for an individual employee in excess of an annual salary of $100,000 (as accordingly prorated). So, for example, if an employee is paid $12,000 per month, only $8,333.33 would be counted in calculating "payroll costs" for determining your potential borrowing limits.

Q: What can I use the loan for?

Loan proceeds can be generally used to pay your employees and maintain your company’s group health-care benefits. You can also use loan proceeds to pay rent and utilities, and to pay mortgage interest and interest on other debt obligations (but not principal in any case) that were incurred prior to receiving your Para. 36 Loan.

Q: Do I have to give collateral?

No. The SBA shall have no recourse against any individual, shareholder, member, or partner of a borrower for non-payment unless that person used the loan proceeds for a purpose not permitted (see Question 5). Moreover, the CARES Act waives the typical requirements of an SBA loan for additional security. Specifically, no personal guarantees and no collateral are required for a Para. 36 Loan during this time period.

Q: What are the interest rates?

Interest rates will be established on a case-by-case basis but will not exceed 4%.

Q: Is it true that money I owe under a Para. 36 Loan can be forgiven?

Yes, in part. Subject to reduction as described below, the SBA will forgive indebtedness up to an amount equal to the following costs incurred during the 8-week period beginning on the date of the origination of your Para. 36 Loan (up to the principal amount of your Para. 36 Loan):

a. Your payroll costs (remember, this does not include payments in excess of $100,000 in salary per annum);
b. Your mortgage interest, if any;
c. Your rent payment, if any; and
d. Your utility payments.

Be aware that the amount paid by the SBA on your behalf as loan forgiveness will be reduced if the number of your full time employees decreases or if you cut wages of employees earning less than $100,000 by more than 25%.

Q: When do I need to pay the loan back?

First, each Para. 36 Loan will have automatic deferment terms (both principal and interest) of at least 6 months. The deferments may be extended for up to a maximum of 12 months. Interest will continue to accrue during deferment. Additionally, you only pay back amounts that have not been forgiven (see Question 8, above). The repayment date and other repayment schedules will be determined on a loan-by-loan basis with the maximum term being ten (10) years.

Q: Are there other issues that may be triggered?

Yes.

Each applicant’s issues differ but you may want to make sure that borrowing money under this program will not trigger acceleration under your current debt financing products. While no collateral is required to obtain a Para. 36 Loan, it is still additional debt.

For example, bank lines of credit often require any additional debt to be approved by your bank no matter what. Also, you will need to carefully track use of these funds to ensure they are allocated to only approved expenditures. And, to the extent proceeds are not forgiven through payment on your behalf to the SBA, you will need to repay the loan at 4% interest.

Q: How do I apply

This is the part that is the most confusing.

Right now, the best place to start the application process is via the SBA’s website. As of March 26, 2020, the SBA has not updated the terms of the CARES Act, but the application process is likely to be the same. Note, reports are that applications will take at least three (3) weeks to process; so, if your business is in desperate need of capital, you may want to apply as soon as possible.

You can read about the disaster loan process below.

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2. What is a Disaster Loan and EIDL

Q: What assistance is available?

Economic Injury Disaster Loans (EIDL) of up to $2 million at an interest rate of less than 4% may be available to “small businesses” to assist them through the disaster recovery period.

Q: Who is eligible for the assistance?

A business must meet the definition of “small” – click on this link to access the current North American Industry Classification System Codes. The size of the applicant alone (without affiliates) must not exceed the size standard designated for the industry in which the applicant is primarily engaged; and The size of the applicant combined with its affiliates must not exceed the size standard designated for either the primary industry of the applicant alone or the primary industry of the applicant and its affiliates, whichever is higher.

For example, to be considered small, most manufacturing firms must have no more than 500 employees and most retail trade firms must have no more than $7 million in average annual sales.

Full-service restaurants must have no more than $8 million in average annual sales.The definition of “affiliates” is broad.

Click on this link to access the current rules regarding affiliation for Disaster Loans.

Q: How much assistance is available?

The maximum loan amount under the current program is $2 million.

Q: What can loans be used for?

Loan proceeds can only be used for working capital necessary to enable the business to alleviate the specific economic injury and to resume normal operations.

You may request an EIDL for the amount of economic injury and operating needs, but not in excess of what your business could have paid had the disaster not occurred. In determining your eligible amount, the SBA will look at: (a) the total of your debt obligations; (b) operating expenses that mature during the period affected by the disaster, plus the amount you need to maintain a reasonable working capital position during that period; and (c) expenses you could have met and a working capital position you could have maintained had the disaster not occurred. The amount of your economic injury does not automatically represent the dollar amount of your loan eligibility; the SBA will evaluate the information you provide and determine the reasonableness of your loan request.

Q: What are the terms of the loans?

The loan can have a maturity of up to 30 years and have an interest rate of 4% or less. The interest rate will depend on whether the applicant has credit available from other sources (e.g., when the SBA determines the applicant does not have the ability to borrow from non-government sources). The maturity will depend on the applicant’s ability to repay the loan.

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3. How does the process work?

Q: What is the new expedited loan process the SBA just put out?

For businesses who have been in business one-year prior to the COVID-19 events, as well as fit the definition of small for the SBA. Can use this website to submit an application.

We are still seeing a large number of businesses needing to fill out all of the ancillary forms and documents.

Q: What are the credit requirements?

Credit History – applicants must have a credit history acceptable to the SBA.Repayment – applicants must show the ability to repay all loans.

Collateral – collateral is typically required. The SBA will take real estate as collateral when it is available. The SBA will not decline a loan for lack of collateral, but requires you to pledge what is available. Under the current EIDL system, the SBA must review your financial statement and one for each partner, officer, director, and stockholder with 20 percent or more ownership.

The SBA requires the principals of the business to personally guarantee repayment of the loan and, in some instances, to secure the loan by pledging additional collateral. It is unclear whether this guaranty requirement will be applied to EIDLs issued in response to COVID-19.

Q: What is the timing?

According to a recent congressional study, the average time to get an EIDL for past disasters has been 43.3 days.

Q: What is the process for obtaining a loan?

You can work with Betterfin and your local SBA Advisor to submit to your local disaster center.

You can apply by mail.

You can apply online through the SBA portal.

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4. What should you do today?

Q: Do you have a budget and financial forecast for the next 6-8 months?

We strongly recommend every business owner put this together. It will help demonstrate to the SBA how your business is affected financially, as well as other lenders in case you are not approved.

Q: Review the forms and documents needed.

The loan application is not trivial there are several documents with many questions and calculations.

Q: Understand your urgency.

We highly recommend every business owner find the time to complete and submit and assistance loan package. In parallel Betterfin works with over 41 banks, CDFIs, and other lenders to help you get options for your business.

Our Lenders can help by
1) Being quick
2) No-obligation
3) Get your free credit reporting, and cash flow analysis

Q: Act Now

Don't be reactive, the SBA’s staff is likely to receive massive numbers of applications, so applying early, being prepared and fully documented, and being patient with SBA staff will be prudent.

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