Small businesses have been hit hard.
PHOTO: KHOLOOD EID FOR THE WALL STREET JOURNAL
WASHINGTON—The sweeping coronavirus aid package set for a House vote Friday provides $349 billion for the Small Business Administration to guarantee loans to small businesses, which have been hit hard by virus-related declines or complete shutdowns in activity.
The legislation calls for the loan money to be distributed using the existing framework of the Small Business Administration’s 7(a) program, the agency’s flagship loan offering. The 7(a) program is a partnership between private financial lenders, which issue the loans, and the SBA, which guarantees them.
President Trump has promised to sign the aid package quickly after final Congressional approval. Here’s a look at how it will work based on the bill approved by the Senate late Wednesday.
Who is eligible for the loans?
Businesses and nonprofits with fewer than 500 employees are generally eligible, with some exceptions. Self-employed workers and gig workers, such as drivers for ride-sharing apps, are also able to apply for loans. Borrowers will need to have been in business as of Feb. 15, 2020, and paid employee salaries and payroll taxes, or paid independent contractors.
What kind of credit profile do I need to borrow?
The main underwriting standards for eligibility will be proof of payroll costs, and will be significantly relaxed compared with 7(a) loans issued during typical times, according to Senate staffers who helped draft the legislation. Trade groups and lenders expect the SBA to release detailed guidelines in coming days on underwriting and application criteria.
How do I apply?
The SBA guarantees the loans, so borrowers will need to apply through banks, credit unions and other lenders. Approximately 1,800 private lenders are already approved to issue 7(a) loans, and at a press briefing Wednesday, Treasury Secretary Steven Mnuchin said the department plans to issue new regulations that will make it possible for almost all FDIC-insured banks to make SBA loans. So the best way to begin is to approach your lender and inquire about applying for a 7(a) small business loan. If your lender doesn’t offer it, try another one.
How long will it take to get the money?
Mr. Mnuchin said he expects that “by the end of next week, we will have a very simple process where these can be made and disbursed in the same day.”
How much money can I apply for?
The legislation temporarily raises the maximum 7(a) loan amount to $10 million from $5 million, and instructs lenders to determine the proper loan amount by using a formula that takes into account a business’s past payroll expenses. The bill also sets the maximum interest rate for these loans at 4% and allows borrowers to defer payments for six months to a year.
What if I can’t repay the loan?
There is a loan forgiveness component included in the bill for businesses that retain their workers or rehire ones that were laid off, according to Senate staffers. Those businesses would be eligible for forgiveness on portions of their loans used for certain costs—including payroll, rent payment, mortgage obligations and utilities—that are incurred during an 8-week period starting on the loan’s origination date, according to the legislation draft. The amount of forgiveness will take into account the number of workers retained or rehired.
I’ve had to lay off my employees because of the crisis, and shut down most of my operations. Am I still eligible to apply for a loan?
SBA officials won’t comment on details while the legislation is pending, but the bill draft specifies that borrowers must acknowledge that the loan funds will be used to “retain workers and maintain payroll or make mortgage payments, lease payments and utility payments.”
What other help is available?
Small businesses in all 50 states and the District of Columbia are eligible to apply for a separate SBA program that provides disaster loans. These are low-interest loans issued directly from the agency. This option may make sense for businesses that need a smaller amount of loan money, since the program’s maximum loan amount is $2 million. The loans carry a 3.75% interest rate for businesses and a 2.75% rate for nonprofits. Businesses that are interested in this program should apply directly with the SBA.
Where can I go for more information?
Loan information will be available from a variety of lenders and at SBA.gov.