Coronavirus Small Business Relief: SBA Loans

Update: The Small Business Administration stopped accepting applications to the Payroll Protection Program (PPP) as of the end of August 8. It still has roughly $134 billion in unused funding though, so Congress may extend the deadline again. Stay tuned for updates.

As COVID-19 pandemic restrictions are being lifted (and some are being reinstated), many small businesses continue to struggle to stay afloat. With a number of business relief programs available at the municipal, state and federal levels – including through the CARES Act – small business owners may be wondering which ones make sense for them. Small Business Administration (SBA) 7(a) loans have emerged as an attractive option.

In fact, one new SBA 7(a) loan program, called the Payroll Protection Program (PPP), was so popular at first that a new stimulus bill had to be passed to appropriate $310 billion (on top of the original $349 billion) for it. If you are thinking of applying for a traditional SBA 7(a), for which the SBA will cover the first six payments, or a PPP loan (new deadline is August 8), here’s what you need to know. As small business owners navigate the coronavirus recession, they may also do well to enlist the help of a trusted financial advisor – many of whom work with both small businesses and individuals.

SBA 7(a) Loans: What Are They?

The Small Business Administration’s 7(a) loans are available for up to $5 million for small businesses in the U.S., including all U.S. territories. The SBA lists the following as possible uses of capital from a SBA 7(a) loan:

• Working capital
• Expansion/renovation
• New construction
• Purchase of land or buildings
• Purchase of equipment or fixtures
• Lease-hold improvements
• Refinancing debt for compelling reasons
• Seasonal line of credit
• Inventory
• Starting a business

SBA 7(a) Loans: How Do They Work?

It is important to note that the Small Business Administration is not a lender itself. The government agency does not provide loans to small businesses or serve as a bank. Instead, the SBA helps small businesses and lenders to connect and provides a guarantee to loans so that lenders have less risk and are more likely to make loans.

Guaranteeing a loan for a small business works the same way it does when an individual uses a guarantor to buy a car or rent an apartment – in the event the borrower is unable to pay back the loan, the guarantor is on the hook to repay the lender.

As mentioned earlier, the SBA is providing debt relief for many of its loans, including 7(a) loans. The CARES Act that created the PPP also authorized the SBA to pay six months of principal, interest and associated fees on 7(a)s, 504s and Microloans that are in regular servicing status. This is automatic and applies to pre-existing loans and new ones that are disbursed by September 27, 2020. Please note: this debt relief is not available for PPP loans or Economic Impact Disaster Loans (EIDLs).

To get a 7(a) loan, you’ll need to find a lender who is registered with the SBA and willing to lend money to your business under the 7(a) program. More information on how to find one of these lenders is below.

SBA 7(a) Loans and the COVID-19 Pandemic

The CARES Act created the Paycheck Protection Program (PPP), which provides loans to small businesses affected by the pandemic, using the SBA 7(a) loan program’s network of approved lenders. The PPP was initially allocated $349 billion, which was gone in less than two weeks. It received an additional $310 billion for loans, of which roughly $176 billion has been given out – so less than $134 billion remains for loans. (Applications have slowed down considerably, though they picked up some when Congress made the terms for forgiveness a little more flexible in June.)

PPP loans are meant to help small businesses maintain their workforce and payroll – and if they do, the loans are forgiven. Loan proceeds can be used to cover payroll costs, including group health insurance and retirement benefits. Up to 40% (this percentage was recently increased from 25% by new legislation) of the loan can also be used to pay rent, mortgage interest and utilities. As long as the small business maintains the same headcount and payroll at pre-pandemic levels (or returns to them by December 31) and uses loan proceeds for authorized uses, all or part of the PPP loan will be forgiven.

Another key difference between these loans and normal 7(a) loans is that PPP loans are 100% guaranteed by the government. That means that lenders can be more flexible than they normally would, said Mike Knotts, the senior vice president of government guaranteed lending at Blue Ridge Bank, which operates in Virginia and North Carolina.

“That puts [the enhanced 7(a) loan] in a good position to help others,” he said. Knotts added that it’s also much simpler to apply for these loans than normal 7(a) loans, with less documentation needed and no collateral required.

PPP loans are available for 2.5 times a firm’s average monthly payroll costs (excluding compensation in excess of $100,000 per employee), up to $10 million. After two temporary stoppages, lenders are processing applications from small businesses, sole proprietorships, self-employed individuals and independent contractors again. When the volume of applications was high, many banks gave priority to existing customers; some still are. If you’re looking for a lender, check out our list of participating banks and their requirements. Also, read our in-depth article about PPP loans, which includes new information about forgiveness. The SBA’s interim final rule is also very helpful if you’re up for reading some highly legalese text.

Types of SBA 7(a) Loans

Outside of the loans for businesses impacted by COVID-19, there are a variety of types of loans available under the 7(a) program. The most common is the standard 7(a) loan. These loans can be for up to $5 million and are guaranteed by the SBA at 85% for loans up to $150,000 and at 75% for loans greater than $150,000. The lender and borrower negotiate the interest rate, but it cannot exceed the SBA maximum interest rate, currently set at 4.25% for prime borrowers using the 7(a) program. The SBA determines eligibility is and generally makes decisions in five to 10 business days.

The 7(a) small loan has similar parameters to the standard 7(a) program, but it is only for loans of up to $350,000. Ths SBA Express loan is for loans of up to $350,000 and has an expedited turnaround time of just 36 hours. As a tradeoff, though, the SBA only guarantees the loan at 50%, meaning the lender is taking more risk. The lender makes the decision about whether or not to approve SBA Express Loans.

There are a number of other types of loans available under the 7(a) banner as well, including loans specifically for exporters and businesses taking part in international trade.

SBA 7(a) Loans: Qualifications

The majority of businesses in the United States are eligible to apply for loans under the SBA 7(a) program. The only eligibility requirements are as follows:

• Operate for profit
• Do business in the U.S. or its territories
• Have reasonable owner equity to invest
• Use alternative financial resources including personal assets before seeking financial assistance

There are a few other stipulations. Franchises, for example, are eligible for the loans unless the franchisor retains a certain amount of power to control operations. Recreation facilities and clubs are eligible as long as they are generally open to the public or have nonrestrictive membership. Farms and fishing businesses are eligible, but they must first explore more targeted funding sources.

SBA 7(a) Loans: How to Apply

While application requirements have been relaxed for loans related to COVID-19, these are the steps for applying for a 7(a) loan at other times:

1. Fill out the SBA Loan Application
2. Complete a statement of personal history and a personal financial statement
3. Prepare and include a profit and loss statement (P&L) and projected financial statements
4. Prepare and include a list of names and addresses of any subsidiaries and affiliates.
5. Attach business license
6. Include past loan applications
7. Include signed personal and business tax returns for the previous three years
8. Prepare and include resumes for each principal
9. Write a brief history of the business
10. Include a copy of your business lease or a note from your landlord

Once all of this is done, you can go about finding a possible lender for your 7(a) loan. SBA has a lender match tool that will help you connect with a lender that gives 7(a) loans.

Other Options for Businesses Impacted by COVID-19

If a 7(a) loan doesn’t work for your business for any reason, there are a number of other options available to you.

In existence before the pandemic, Economic Injury Disaster Loans (EIDLs) are available in any state or territory where an economic disaster has been declared. These loans provide temporary assistance to businesses that have been impacted substantially by the current crisis. EIDLs can be for up to $2 million, though because demand is so high, the SBA is limiting initial disbursements to $15,000 for two months. This limit is on top of the $10,000 forgivable advance that the CARES Act authorized. (The advance, however, is no longer available; the program has given out all $20 billion of its allocation.)

The latest stimulus bill also replenished funding for EIDLs. It received $50 billion for loans and another $10 billion for advances. At first, the SBA was not accepting new applications from non-farm businesses – and it was reportedly capping loans at $150,000. But as of June 15, it began accepting applications again. You can apply for an EIDL here.

Small business owners should also examine their business interruption insurance coverage. Additionally, there are a number of state and local programs available that may be able to offer grants or loans to businesses that are negatively affected by the COVID-19 pandemic.

The Bottom Line

The Small Business Association’s 7(a) loan program offers guaranteed loans to small businesses for up to $5 million. The infrastructure for 7(a) loans is also being used by the Paycheck Protection Program, which was created in response to the coronavirus crisis. PPP loans are guaranteed at 100% by the government and require no collateral and minimal paperwork. Additionally, there are a number of other programs both federally and locally that can help small businesses through this difficult time period.

Small Business Tips Amid the Coronavirus Recession

• A financial advisor can help with both your small business and your personal finances. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
• If you’re just starting a small business, make sure you choose the right business structure, taking things like taxes into account.
• Don’t forget about yourself. Use our coronavirus stimulus check calculator to see if you qualify for government money.