SBA Loan Options Under the CARES Act

April 8, 2020
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Last week on the Illumination Wealth Blog, we shared a simple list of links and resources for the CARES Act stimulus package. Please check it out if you haven’t already. In this article, we want to focus on certain components of the act that directly affect small business owners. More specifically, we’re going to be talking about temporary changes to Small Business Administration (SBA) Loan programs and the new options they may provide.

SBA 7(a) Loans

The 7(a) loan program is the SBA’s primary program that provides financial assistance to small businesses. There are several different types of 7(a) loans, including the Standard 7(a), the 7(a) Small Loan, the SBA Express and others. The CARES Act changes parameters of these various business loans to help struggling companies get through a prolonged slowdown or, in some cases, a complete business shutdown until the coronavirus situation is under control.

For example, the Standard 7(a) loan typically has a maximum loan amount of $5 million. The CARES Act raises that maximum amount to $10 million. It also expands the allowable uses for a 7(a) loan by lifting some usage restrictions. This includes using the capital for expenses such as payroll support, paid sick and medical leave, mortgage payments, insurance premiums and other debt obligations that may have not been allowable before.

The CARES Act effectively enacts these temporary changes through the end of 2020. However, we will have to see how this all plays out over the next few months as more stimulus packages may get passed and even more SBA loan changes could go into effect.

Small businesses, nonprofits and veteran organizations with 500 or fewer employees would have to prove eligibility for an SBA 7(a) loan under the CARES Act. A few of the most important eligibility requirements include:

  1. Proof that the business was operational as of February 15, 2020.
  2. Proof that the business had paid independent contractors and/or employees receiving paid salaries and paying payroll taxes.
  3. Whether or not the business has been significantly impacted by COVID-19.

Loan Forgiveness

Some borrowers whose businesses are affected by COVID-19 may be eligible for loan forgiveness on existing SBA loans and new SBA loans under the CARES Act. You would want to talk with your financial advisor and SBA loan lender for more details. In a time like this, it’s very important to understand all your options and make sound financial decisions. The CARES Act is designed to help struggling businesses get through a difficult period and SBA loans can be beneficial, but you still have to read the fine print to avoid further complications down the road.

Getting Prepared

If you are planning to apply for an SBA loan of any type in the near future, you will want to gather the following information as soon as possible:

  • 3 years of business tax returns and personal tax returns for anyone who owns 20% or more in the company
  • A personal financial statement for any owner of more than 20% of the company
  • Get your 2019 tax returns done sooner than later (or at least have your complete 2019 year-end financials ready to share with your lender)
  • A debt schedule for your business
  • Accounting figures that show your monthly operating expenses from March through August of 2019

SBA Disaster Loan Assistance

A part of the CARES Act, eligible businesses may be able to apply for a SBA disaster loan just like they would if a natural disaster were to impact your normal operation. Remember that this kind of loan is designed to keep your business going—covering payroll, operating expenses and debt payments. However, it is not meant for consolidating debts.

There is a lot of fine print with an SBA disaster loan, which will be funded by the U.S. Treasury and not a private bank. You will have to show that you need the financial help to keep your business afloat. You will need to have a good credit history and be able to display your ability to repay the loan. The terms are very forgiving with deferred payments early on, good interest rates and no closing costs or fees. This may be the best option for your business right now, but you have to do proper research before going down this path.

Making the Right SBA Loan Decisions

In summary, the CARES Act is designed to help many struggling American businesses who are dealing with the fallout of the coronavirus pandemic. An SBA loan might be the right solution for some business owners while not as ideal for others.

Be sure and speak with your financial advisor, lender, tax advisor and anyone else that you trust to help you make good financial decisions. Explore all your options and research the changes to SBA loans under the CARES Act before making any big moves.

Illumination Wealth works with many small business owners and individuals who are dealing with major financial decisions right now. If you have questions or want to discuss your business’s financial plan for 2020 and beyond, contact us today and schedule a no-obligation introductory consultation with one of our top financial advisors.