First, remember that our country has never seen a crisis like this before – ever. These are scary times to be a small business owner. There are lot of unknowns and lots of needs out there.
What is the new Loan Program being considered by Congress this week?
As of 3-25-2020, the House has not agreed to the Senate passed compromise but there is speculation that the deal was approved by the House Speaker and will probably move through the House and go to the president for signature within the next week.
The main feature of the current legislation for small businesses is a loan program. SBA will put a $350 Billion loan fund together for small businesses with the aim to deliver funds to borrowers on an expedited basis. The regular application process of most Section 7 (A) programs takes at least 3 months to process directly through the SBA. The aim of this loan program is to send most of this new loan money out to banks who already know how to do SBA loan packages, and have them distribute the loan funds more quickly than 3 months.
Who Qualifies for the Loans?
This program is earmarked for use with small businesses only. Small businesses are defined as those with under 500 employees. Each applicant company is limited to $10 million loan max. The maximum per company loan amount may be further limited by your company’s needs for short term cash needs, but regulations have not been implemented on that yet. So not everyone will get $10 million.
What do we have to do to qualify for the loan?
No underwriting is required under this program, so asset values, P&L statements, and profitability, or current cash positions are not going to be considered as loan criteria. In short, if your company loses money currently, or over the past, your company can still get this loan. There will probably be personal guarantees required by business owners. These are unsecured loans as best we can tell preliminarily.
What are the allowed uses of the loan proceeds?
The SBA will be providing this loan money to cover payroll, current debt obligations like rent, bank loan installment payment obligations, equipment lease payments, utility bills, insurance, repairs, supplies, etc. These are normal operating overhead expenses of your business, including your current credit line debt payments and even your business premises mortgage if the company owns the building.
What is the interest rate and repayment terms on this new SBA Loan?
We don’t know what the interest rates will be exactly, yet. As to the payment terms, the borrowing company won’t have to pay back a portion of the loan depending on meeting certain requirements, such as maintaining your current payroll and not laying off staff, and staying open for business, but the details are not available yet. There will be a requirement that a certain percentage of the loan amount cannot be forgiven and will have to be paid back. We don’t have numbers yet, but the intent is to keep interest rates at low single digit rates. There will probably be a provision for making no payments or interest-only payments on the new loan for up to the end of the first year.
How will the applications be administered, where can I sign up?
Banks are now putting their software together to deploy the money as quickly as possible. The government knows that it need banks to deploy this money. There will be a number of other programs for loans for disaster recovery that will also be available, and you need to ask your bank what programs they can help you qualify for. For example, there will be multiple programs for the public like unemployment funds support, disaster loans, government support programs such as food stamps and child welfare. For these direct government programs, you need to check the federal government websites, and SBA special loan programs such as asset based lending, as well.
How fast can the money be paid to us?
Last year SBA processed 50,000 direct SBA loans over the entire year. Last week, 300,000 loan applications were filed from California alone. These were just the applications made directly to the SBA website.
Where do I apply for the loan program?
Each borrower has 2 options, either apply through your bank or direct with SBA. There is a chance that the federal SBA direct application program may be a little cheaper in terms of administrative setup cost and interest rate, and that going through a local bank will be a little more expensive. But, there is no guarantee that SBA will be able to receive and process your application quickly. In fact, every indication from prior disasters is that they will not be able to handle the volume of applications, and will move too slowly to meet the fast track funding goal of this new legislation. The SBA is likely to take many months vs. weeks by banks – to fund the loans.
What are the application fees?
What we are hearing is that many Banks won’t charge you an administrative processing fee for their services in processing these loans. But those that do, you need to get assurances from them that they are going to be able to deliver the funds faster and within days, to justify paying extra fees for loan placement services.
Where is the Legislation right now, and how long until the program can roll out?
At present, the Senate has passed a compromise bill. That bill now goes to The House for a approval or a joint conference to resolve the differences between the House bill and Senate bill. Once approved by the House, it will be signed by the president. We will know how soon the funds can flow after early next week, when the House meets to approve or negotiate the bill’s terms.
We plan to send an email later next week, with the program details, and show you how you can sign up then with the SBA or other lender. Will state the terms and docs needed to be uploaded. Then system will vet for completion, and proceed to submit to banks for disbursement.
How does this program differ from Main Street Lending program?
You can qualify for up to $2 million as a loan under the Main Street Lending SBA Program, but you have to submit that application directly to SBA. Just for that Main Street Lending program, the SBA will have to handle 30,000 applications per day by phone, and SBA does not have the ability to move fast. For example, during the Hurricane Sandy Main Street Lending Program, the funds took over a year to get disbursed to borrowers from their application date.
The objective of the new SBA loan program will be to move funds fast.
Congress understands: companies don’t have months to wait for funds. So the loan programs have to go through the private banking route this time to prevent backlogs.
Can I use the Loan Money to refinance my current debts vs. using it only as a new loan to make the payments of existing loans?
SBA won’t allow you to refinance your existing loans as a stated use for this loan money. It will only finance the loan to cover current debt payments on existing loans. So you cannot use the money to retire old loan balances, just to meet the current debt payment installments. The specific terms of how that will be enforced has not been finalized yet. But the Senate’s draft bill says the loans are for giving funds to make payments, not to refinance.
Will this work as a credit line, with future draw allowed? Or do I have to borrow the full amount right away, and pay interest on the whole loan balance monthly?
This is not structured to allow use as a credit line vs. straight loan. It is not possible to create this loan program as a credit line, due to difficulty to administer payouts. So the program will only be a straight loan with monthly payment terms. The commencement of repayment or perhaps an interest only payment feature may be included for the early term (6 months to one year perhaps).
Where do I shop for this new loan?
There are currently over 3,500 total banks in the USA who regularly process SBA loans. But, buyer beware! If your bank does not know what they are doing, it can cause you to suffer a long delay in funding. So you have to use banks who know the SBA process and who are set up already to process SBA loans. This process is very different than doing commercial loans by community banks.
Is new SBA Loan required to be secured by my home or business assets?
So far, no pledge of personal collateral is required to be pledged to secure the loans. Business assets may have to be pledged as collateral, but most people will understand that pledging business assets is not a big risk, compared to pledging your home equity.
If your home does not have equity, it looks like this will not prevent you from getting approved. There will probably be no second mortgage required on your home.
Also, if have you already have existing credit lines for your business, this debt is subordinate to those existing business loans. The SBA loan is designed to be in second position. We don’t know yet if personal guaranties are required or what percentage of the original loan balance will be forgiven or on what requirements, under this new SBA loan program yet.
More updates will be published once we get details from the House version and the final bill is put together early next week.
Don’t call us this week for more details, these have to wait for the legislation process to complete.