Millions of jobs and small businesses are being threatened by the COVID-19 health crisis and the subsequent economic crisis it is causing.
While accessing the Small Business Administration (SBA) program can be challenging, the resources can be of great benefit for small business owners and entrepreneurs during this unprecedented time.
If your organization supports, trains, funds or otherwise is a champion for entrepreneurs, please share the resources we’ve put together below with the businesses you interact with. Together, we need to focus on helping those business owners who are most vulnerable right now, to get them through this troubling time.
The SBA is the vanguard of government assistance for businesses during this crisis. While it administers several programs that can be helpful to entrepreneurs, two in particular – the Paycheck Protection Program and the Economic Injury Disaster Loan – are the most common right now. Here are some resources in response to common questions entrepreneurs will be asking about the process.
Q: How do I apply for these loans, and who can apply?
A: In order to be eligible for a small business loan, you must be a small business (usually 500 employees or fewer, though slightly larger businesses may qualify in select industries). Nonprofits also are eligible for benefits. SBA disaster loans are available only for U.S. citizens or permanent residents (with a green card); there are other resources with different qualifying criteria.
The chart below provides a bit of guidance on how the application rules vary between SBA’s two flagship programs. You are eligible to use both loans, but you cannot use both loans to pay for the same expense. They must be used differently.
ECONOMIC INJURY DISASTER LOAN
[✓] – Headquartered in a U.S. state or territory?
[✓] – Is your business defined as a small business by the SBA?*
[✓] – Is your business unable to pay normal and necessary operating expenses because of COVID-19?
[✓] – If seeking funding of more than $200,000, is the business or its owners willing to pledge assets if the business cannot repay the loan?
[✓] – Will the business be reliable to pay back the loan? (Ultimately determined by the SBA)
PAYCHECK PROTECTION PROGRAM
[✓] – In business as of Feb. 15, 2020?
[✓] – Have fewer than 500 employees?
[✓] – Pay employee salaries?
[✓] – Pay payroll tax?
Q: What is the Paycheck Protection Program?
A: Congress put $349 billion into the PPP program to accomplish two goals:
- Help small businesses cover their near-term operating expenses during the crisis.
- Provide cash incentives for entrepreneurs to keep their employees.
This program is intended to help you replace your revenue during this period of severe disruption. There are three major benefits:
- These loans can be big. The maximum loan size for businesses is equivalent to 250% of the employer’s average monthly payroll costs (roughly 10 weeks of payroll expenses) or $10 million, whichever is less.
- You are eligible for loan forgiveness equivalent to certain expenses (mostly staff, along with a portion you spend on rent, utilities and more) during the eight-week period under which the loan is originated.
- Since many businesses have already been forced to lay off or furlough employees, the program also includes a clause that allows you to qualify for loan forgiveness, up to $10,000 per employee, if you rehire back to your staffing level pre-crisis (Feb. 1, 2020) by June 30, 2020.
The bottom line: If you keep your doors open as a business and keep your staff employed, your SBA loan converts to a grant.
If you want to apply: You’ll have to go through a lender intermediary. SBA has pre-approved several large classes of banks to administer the program, and you can find a list of participating lenders here. Start gathering your materials and filling out a sample application today.
Q: What are Economic Injury Disaster Loans?
A: Unlike PPP, which is a new program created by Congress in response to the current crisis and implemented by banks, Economic Injury Disaster Loans (EIDL) is an existing program that SBA maintains to provide loans to businesses hit by disasters. Typically, this infrastructure gets mobilized to help businesses after a flood or a hurricane, but Congress has expanded the program to cover any business that can show negative impact from COVID-19.
Business owners here can apply for up to $2 million in loans at a fixed 3.75% interest rate (2.75% for nonprofits). Unlike PPP, these loans cannot be forgiven.
The bottom line: EIDL is true debt (not a forgivable loan like PPP), offered directly through SBA. You may also have the potential for a $10,000 advance through SBA if you meet certain criteria.
If you want to apply, you can do so here.
Q: What questions should I be asking as I apply?
A: In order to prepare for the application, you’ll need to gather a number of documents for PPP and for EIDL — most of which are the same, with some key differences. We recommend a read-through before filling out an application.
The most important thing you can do is think through the economic scenario that will help you survive. Take this one quarter at a time. While we do not know when or how the economy will come back, we’d encourage you to think through a scenario where you do not grow in revenue over the next three months. Give your best answer to a few questions:
- To keep at least 90% of your staff (as of Feb. 1, 2020), what will payroll costs be?
- What fixed costs (rent, utilities, etc.) are not avoidable?
- What costs are discretionary that you can cut?
- What revenues have been maintained over the past two weeks? (If you are a restaurant, what has takeout business been like, versus dine-in)? Who among your current customers are recurring and committed or extremely likely to renew?
- To prepare for survival, we would assume no new revenues in the next three months.
This exercise will help you as a business owner and will also help you prepare to fill out SBA Form 1368, which is essentially a forecast of your future cash flow.
The application will need other information:
- A filled-out SBA business loan application (for PPP or EIDL).
- Financial information for the owners of the business applying for a loan.
- Your recent tax returns for the business.
- Any liabilities the business has.
Q: This seems very bureaucratic and confusing. Can I get help filling this application out?
A: The Alabama Small Business Development Center (an SBA Resource Partner) is Alabama’s one-stop shop when it comes to access to capital for Alabama’s small businesses. You can subscribe to its newsletter to get updates on SBA’s lending programs for COVID-19 (EIDL and PPP) and register for SBDC’s online training programs to learn how to prepare to apply. Learn more about SBDC services and find the ASBDC location nearest you. For those in Huntsville, the Catalyst Center for Business and Entrepreneurship is a great resource. Finally, find a SCORE mentor willing to work remotely near you by searching your ZIP code in the SBA’s Local Assistance finder.
In addition to these entrepreneur support organizations, you may want some additional individual help. Check with an accountant who may be able to help or advise, as many accountants have experience filling out these applications. There are also small business loan consultants who fill these out, usually for a fee.
When in doubt, apply for the SBA loan, even though the process is somewhat complex, and it may take time for the application to be approved. The sooner you get your business in the line, the sooner you may get relief.
Q: What other resources are out there beyond SBA loans?
A: Here’s a list:
- Hello Alice has $10,000 business grants available, funded by partners like Salesforce, and is also listing as many local response efforts daily through its COVID-19 Business Resource Center.
- Cities like Birmingham and regions like West Alabama are setting up programs – new programs launch every day. You’ll find updated links to these on the COVID-19 funds portion of ALtogether’s Local Resources page.
- Online lending platforms such as WeFunder, which is offering $20,000 to $1 million for affected companies, are offering special programs. If your business uses a payment processor like PayPal or Square, programs such as PayPal Working Capital can help you smooth your income.
- Community development financial institutions, microlenders and community banks are often the lenders of first resort in times of crisis. They also fill important gaps in access to capital for newer businesses, as well as businesses owned by women, people of color or people with less-than-perfect personal credit. You can find ones active in Alabama under the CDFI section of ALtogether’s Local Resources page.
- For a complete list of alternative funding programs available, check out the comprehensive business funding page on ALtogether.
Our country will get through this crisis. Yet the pain so many business owners and employees are suffering right now is real and very scary; our hope is that this short guide will help you find a path to survive the coming months and thrive on the other side.
- Portions of this post originally appeared on the Kauffman Foundation website. Thanks to Indie.VC for the visual explainer of PPP and SBA Disaster Loans.