More than three-quarters of small businesses have already been negatively impacted, according to a National Federation of Independent Business Survey.
The problem is: nobody can predict when this situation will end. Just this week, President Donald Trump extended nationwide social distancing guidelines to April 30, reversing his earlier promise to re-open the economy by Easter (April 12).
Unless you’re selling hand sanitizer or working on a vaccine, chances are your business will take a hit. In times like this, your small business’s survival could depend on getting a loan. Here, we outline the best types of business loans for getting through these challenging times.
The CARES Act and SBA Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law March 27 promises $2.2 trillion in stimulus measures. From an SMB perspective, the most important measure is the Paycheck Protection Program, which allocates almost $350 billion to support emergency business loans.
The Paycheck Protection Program expands the scope of SBA loans (loans offered by private lenders and backed by the federal government’s Small Business Administration). The program will be open to businesses with fewer than 500 employees, including sole proprietors, independent contractors, and self-employed individuals. Applicants must demonstrate their business has been affected by the situation in order to receive a loan. It’s expected private lenders will be able to start issuing SBA stimulus loans and payment protection program (PPP) business loans within a couple of weeks.
Funds may be spent on the following: payroll costs, employee salaries, interest payments on any mortgage, rent and utility payments, costs related to the continuation of group health care benefits, and interest payments on other debt obligations.
Here are the main features of the SBA’s Paycheck Protection Program:
- The program will run till June 30, 2020 (although it may be extended);
- Each business may receive up to 2.5 times its average monthly payroll costs, up to a $10 million limitation;
- Maximum term is 10 years;
- Maximum interest private lenders can charge is 4%;
- No collateral or personal guarantee required;
- No prepayment penalties;
- Typical SBA loan fees are waived for a loan obtained through this program; and
- Borrowers are eligible for loan forgiveness equal to certain costs (payroll, mortgage interest, rent, utility payments) in the 8 weeks following origination.
In addition to the above, the SBA has three other programs to assist businesses during this period.
- Economic Injury Disaster Loans and Loan Advance.This is a permanent program under which SBA-authorized private lenders provide small businesses with working capital loans of up to $2 million to overcome temporary loss of revenue. Small business owners can apply for an advance of up to $10,000.
- SBA Express Bridge Loans. This program allows small businesses who currently have a business relationship with an SBA Express lender to access up to $25,000 with less paperwork.
- SBA Debt Relief Program. As part of the CARES Act, the SBA will provide relief for small businesses with existing SBA 7(a) loans, 504 loans, and microloans. The SBA will cover principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the enactment of the CARES Act.
Other Types of Loans and Programs to Get You Through This Period
There are more than 30 million small businesses in America–and not all will be eligible for SBA relief. Here are some other options for businesses that don’t qualify for the Paycheck Protection Program. Note: all these options are subject to the usual risks you take when borrowing from a private lender.
Short-term loan. Also known as a “bridge loan”, this provides funding when you need quick access to capital. Some private lenders can provide the funds in as little as 24 hours.
Line of credit. A line of credit gives your business breathing room. It lets you borrow as much as you want and as often as you want, up to a predetermined credit limit. Funds are usually made available within 24 hours, making this another good option for covering immediate costs. The best thing is you only pay interest on what you use.
Invoice factoring. This is an alternative loan product where you sell your invoices to a lender (also called a factor) at a discount. If you’re worried about your customers paying you in time, then invoice factoring is an option to consider.
Home Equity Loan. A home equity loan allows homeowners to borrow against the equity in their property. Although this is technically a type of mortgage and not a business loan, a HEL (or home equity line of credit, HELOC) is often a simple way to access a large sum at a decent interest rate.
The Bottom Line
This is going to be a difficult period for the vast majority of American businesses–and it could get worse. Fortunately, help is at hand. If your business needs a cash injection to survive, then it pays to know and compare your options.