Type: Law Bulletins
Date: 03/18/2020

SBA Part One: COVID-19 Guidance: SBA Disaster Loan Program

Many small businesses have been negatively impacted by COVID-19. The Small Business Administration (SBA) provides disaster loans to help businesses recover from declared disasters.

What is a small business?

Your industry may subject you to a different standard, but the general rule of thumb is that the SBA defines most small businesses as having less than 500 people. A company’s average annual sales may also be used for the small business designation. In Indiana, over 99% of businesses are classified as small businesses. When in doubt, complete the application.

How do you qualify for an SBA Disaster Loan?

The first requirement is that your state’s governor sign a declaration that is then provided to the SBA administrator. Once it is processed, small businesses in that state will be eligible to apply for a Disaster Loan.

What are the specifics about the SBA Disaster Loan program?

The maximum loan amount is $2 million and the maximum term is 30 years. The loan is not “free money” and does accrue interest at the rate of 3.75% for a for-profit business and 2.75% for a non-profit entity. Loans under $25,000 will not require collateral. Loans more than that will require collateral and that could be a third or higher lien position on real estate, such as a family home. A disaster loan will not be declined for a lack of collateral, but a borrower pledge is needed on whatever collateral is available. The loan will be limited to an amount the business needs and can afford to repay. These loans can be used to pay bills, make payroll and meet current related business needs and expenses. There is no cost to apply for this loan, nor a requirement to take it once approved and offered. 

Who will not be approved for an SBA Disaster Loan?

There is a credit underwriting requirement to this loan. If the entity has bad credit, has defaulted on a prior SBA loan, or the business has credit available through another source — a business line of credit, for example — the entity will not be eligible. If a borrower already has a disaster loan, the borrower may still be eligible for another loan based on the COVID – 19 disaster, but cannot consolidate the loans. 

How long will it take to get funds under this program?

It may take up to 48 hours for the SBA administrator to process a declaration of a disaster once received. In Indiana, Governor Eric Holcomb provided such a declaration to the SBA administrator on March 17, 2020. Therefore, you can expect applications to be available by March 19 or 20, 2020, if all is working smoothly. Loan applications will be available here. Upon submittal of a complete application, it can take 18-21 days to approve and another four business days for the funding to occur. However, the SBA has never dealt with the implementation of the disaster program on such a massive scale so expect delays. 

What can you do if you need funds now and cannot wait?

You can contact any SBA partnering non-profit lender and request an SBA microloan of up to $50,000. Similarly, commercial lending partners may offer SBA express loans up to $350,000 and/or SBA 7a loans up to $5 million. The 7a loans are typically processed within 30 days, while microloans and express loans are processed even more quickly.

What can I do if I cannot make payments on my current SBA loan?

You may apply for a disaster loan. Additionally, you should contact your bank and ask for a deferral. SBA loans that have been sold on the secondary market can be eligible for a  three month deferral on payment (banks have a one time unilateral right without investor consent to approve this). If the loan was retained by the lender, it is eligible for up to a six month or 20% of their loan amount deferral. The maturity date of the loan may also be extended up to the program date.

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