The Financial Impact of COVID-19 On U.S.-BASED Small Businesses

Around the world, the  impact of the COVID-19 outbreak (aka the coronavirus) has necessitated governments to implement some sort of financial rescue plan for those sectors that have been adversely affected.

In the United States, small and medium size businesses have been very hard hit, especially because these small businesses have not been adequately resourced by the federal and state governments’ bailouts programs during periods of financial difficulties. That inadequacy ultimately led to outsourcing of jobs and high employment. It is interesting to note that, according to available data, 60% of economic growth and employment in the United States is generated by the small and medium business sector.

The impact of the coronavirus on economic growth and unemployment in the United States naturally caught the attention of lawmakers in Washington. It has become abundantly clear that small and medium-sized businesses that are facing—and will continue to face—unprecedented financial difficulties urgently need to have short- to long-term financial assistance from the federal government. If your small business has been adversely affected, help may be on the way, but it will be up to you to reach for it.

The CARES Act

In March 2020, U.S. President Donald Trump signed into law the Coronavirus Aid, Relief and Economic Security (or CARES) Act, a bi-partisan stimulus package which was hastily drawn up to address the urgent need to provide financial help to small businesses in the United States. Among other things, the stimulus package contains $376 billion in relief for small businesses and American workers. This relief loan program is to be administered by the Small Business Administration (SBA) and funds will be made available to eligible small businesses through participating banks/lenders.

If you are a small business owner with fewer than 500 employees (though there are some exceptions), no doubt you will find this article very helpful. It is very important for every small business owner to fully understand all aspects of the government’s debt relief program and exactly what the qualifying criteria are.

Note that, while the SBA generally defines a small business as an entity with 500 employees or less, there are specific size standards which will be dependent on the type of business you own. If you are in any doubt, it will be a good idea to look up your specific NAICS code (North American Industry Classification System) before you apply for SBA debt relief.

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WHO IS ELIGIBLE

Briefly, small businesses that may be eligible for the federal government’s debt relief plan include:

  • Businesses with fewer than 500 employees
  • Businesses that begin with NAICS code #72 (accommodations/food services) which have fewer than 500 employees at each physical location
  • Businesses that commenced operations on or before February 15, 2020
  • Businesses that meet the SBA’s industry-based size standard or annual receipts.
  • Not-for-profit entities or agencies (except those which receive Medicaid funds)
  • Veterans organizations and tribal concerns
  • Independent contractors, self-employed individuals and sole proprietors
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FUNDING OPTIONS

Provided your small business meets the qualifying criteria and is eligible for assistance, there are a few funding options that may be available to you:

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Paycheck Protection Program 

The Paycheck Protection Program option is intended to help small business owners assist their own employees during the COVID-19 crisis by ensuring that they continue to receive a paycheck during this emergency.

The unique aspect of this option is that the SBA will forgive the loan (i.e. repayment of the loan will not be required) if the business owner ensures that all of the company’s employees are retained for a minimum of eight weeks and that the majority of the proceeds of the loan (with a minimum of 75% of the funds) were used for payroll. The remaining loan proceeds may be used by the small business owner for business-related expenses such as rent, mortgage, interest payments and/or utilities.

In order to qualify for loan forgiveness, the employer must also maintain or quickly rehire employees and must maintain salary levels. The amount of the loan forgiveness will be reduced if wages or salaries decrease or if the headcount of full time employees declines.

In the event the full amount of the loan is not forgiven, the loan will have a maturity of two years and will accrue interest at the fixed rate of 1% per year. The SBA will not require collateral or a personal guarantee for loans granted under this provision.

Borrowers can apply for a loan of up to $10 million from an SBA participatory lender. The loan amount will be based on previously documented payroll and other business expenses.

Businesses that are cyclical or seasonal in nature and which would typically operate in the period between April and June are also eligible for relief. The business owner will be required to provide the SBA lender with evidence of work over an 8-week period from the previous calendar year (from February 15, 2019 through June 30, 2019).

Applications for relief are already being accepted. Small business owners should be aware that this option will be available only through June 30, 2020. However, given that the COVID-19 situation continues to evolve, this date may be extended. It is recommended that you visit the SBA website for any additional updates or changes.

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Economic Injury Disaster Loan Emergency Advance

The SBA’s Economic Injury Disaster Loan Emergency Advance can provide much needed economic support to small business owners to help overcome the temporary loss of revenue they they may be experiencing as a result of the coronavirus.

This program is intended for any small business with fewer than 500 employees (including sole proprietorships, independent contractors and individuals who are self-employed), private non-profit organizations or 501(c)(19) veterans organizations or tribal entities that are affected by COVID-19. Faith-based organizations are also generally eligible to apply for the EIDL. Businesses in certain industries that have more than 500 employees may also be eligible if they meet the SBA’s size standards for those industries (for example, food services and industries that provide accommodations).

Under the EIDL, funds can be advanced to a small business owner in an amount up to $10,000. Typically, funds are available within days of acceptance of the application. The Economic Injury Disaster Loan is, for all intents and purposes, a misnomer; essentially, it is a grant which does not need to be repaid. Even if your small business is denied a loan, your company can still apply for this grant.

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Expanded Access to EIDL

The SBA is also providing expanded access to its Economic Injury Disaster Loans. The SBA, under the program, can provide eligible small business owners and other entities with up to $2 million in working capital funding.

The interest rates applicable under the loans will depend on the borrower type. A working capital loan to a non-profit entity will accrue interest at 2.75% per annum, while a loan to a small business will accrue at the rate of 3.75%. The repayment terms can extend to 30 years but will generally vary and are are dependent on the borrower type and applicant. Payments may be deferred up to 48 months. Small businesses with fewer than 500 employees will generally qualify for this program. Loans under $200,000 will not require a personal guarantee.

The Financial Impact of COVID-19

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SBA Express Bridge Loans

The SBA’s express bridge loan facility allows a small business owner who already has an established business relationship with an SBA Express Lender to quickly access up to $25,000 in funds. These funds are intended to provide vital economic support to small business owners to help them overcome the temporary loss of revenue. Essentially, under the Express Bridge Loan, the proceeds can be used in either of two ways. First, they may be used to bridge the gap (while they await a decision and disbursement on the application for the SBA Economic Injury Disaster loan); second, the proceeds can be used as a traditional term loan. Regardless of the ultimate use of the proceeds, this loan will ultimately be repaid (in full or part) by the loan proceeds from the EIDL.

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SBA Debt Relief for Existing Borrowers

The SBA is also providing debt relief to existing borrowers. To that end, the SBA has announced that, effective immediately:

  • For a period of six months, the SBA will automatically make principal, interest, and fee payments of existing 7(a) and 504 loans, as well as microloans.
  • For a period of six months, the SBA will automatically make principal, interest and fee payments on new loans including 7(a) and 504 loans, as well as microloans that are issued prior to September 27, 2020.
  • For existing SBA Serviced Disaster (Home and Business) Loans, the SBA will provide an automatic deferment (provided the disaster loan was considered in “regular servicing status” as of March 1, 2020).

Borrowers of an SBA loan should understand that interest continues to accrue on the existing loan even if it is automatically deferred. Payment notices will still be mailed out though the notice will clearly state that no payment is due as the loan has been deferred.

Of note, it is the borrower’s responsibility to ensure that any pre-authorized debits or recurring payments are canceled on a loan that the SBA has deferred. Borrowers may still make payments on the loan, at their discretion. Once the deferment period has ended, the borrower will be required to resume making payments. If necessary, it is the borrower’s responsibility to re-establish recurring payments or pre-authorized debits.

There may be additional debt relief for small business owners and it is recommended that you contact the SBA or your SBA lenders for more information.

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Where to Find Help

Your first target must be the Small Business Administration website. From there, you can get information on the SBA’s efforts in the wake of the COVID-19 pandemic. Generally, any application for assistance can be started online, though supporting documentation will need to be mailed in to the SBA’s Processing and Disbursement center in Texas. If you have questions, the SBA’s Disaster Assistance Customer Service center can be reached by phone or by email.

Another good source of information would be the Small Business Administration district office in your state. While most offices are closed to the general public, customer service via phone or email is generally still an option.

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In Summary

Because there is still no clarity as to duration of this economic emergency, the information contained within this article should be considered fluid. As a small business owner, it will be in your best interest to go directly to the SBA website for up-to-date information, or reach out to the SBA lender which services your loans.

Furthermore, understand that the SBA, in conjunction with the SBA approved lenders, is still working out the kinks as to how best and expeditiously to provide assistance. As one might imagine, the incredibly high number of applications and the limited human resources of the SBA and its banking partners mean that small business owners may need to exercise a great deal of patience as they work through this process. Lastly, when you do finally reach someone, remember that that person on the other side of the phone is as frazzled and worried as you, so be kind, be patient, be understanding; it is together, as a cohesive unit, that we can all get through this.

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