SBA Part Two: I Need to Apply for an SBA Disaster Loan. What Do I Do Now?
*The original article posted on April 16, 2020 has been updated to reflect changes as of March 24, 2021.
First, review our previous SBA Disaster Loan article, found here, to bring you up to speed with this national program that is available in every state, all territories and the District of Columbia.
Businesses that are not eligible for this program include casinos, charitable organizations, religious organizations, farmers and real estate developers that are primarily involved in subdividing real property into lots and developing it for resale for themselves (other real estate entities may apply, such as landlords).
It is expected that between 350,000 to 500,000 businesses will be applying for a Small Business Administration (SBA) Economic Disaster Injury Loan, also known as the SBA Disaster Loan. Currently, the SBA is estimating that after an application is completed and submitted, it will take between 21-30 days to receive a response. If the response is favorable, it will take an additional 4-5 days after the promissory note and any other ancillary documents are signed and returned to the SBA for funds to be disbursed into the bank account provided by the borrower. The Coronavirus Aid, Relief and Economic Security Act (CARES Act) authorizes a grant of $1,000 per employee, up to $10,000, through the EIDL Disaster Grant program to disaster loan applicants, advanced within three days of receipt of the completed application and a self-verification of eligibility. Even if your application is not approved, you may keep the EIDL Disaster Grant. The SBA announced it is increasing the maximum amount small businesses and non-profits can borrow through the EIDL program. Starting the week of April 6, 2021, the SBA will raise the loan limit from six months of economic injury with a maximum loan amount of $150,000 to up to 24 months of economic injury with a maximum loan amount of $500,000. Borrowers do not need to contact the SBA regarding increases. Rather, the SBA will contact borrowers directly via email directing borrowers on how an increase can be obtained.
We are encouraging most clients to apply for the SBA Disaster Loan on their own. There is a lot of traffic on the SBA website and it can overload, pause and error out. Therefore, it can be very time consuming. Our advice is to try completing the application between 7:00 p.m. and 7:00 a.m.
The application will request the following information:
- Personal Information such as name, address, email, etc.
- Social Security numbers or EIN of applicants.
- Financial Information (e.g. income, account balances, and monthly expenses).
- Disaster Request for Transcript of Tax Return (Form 4506-T).
- Complete copies of the most recent Federal income return or financial statements.
- Personal Financial Statement (Form 413) for each principal owning 20% or more and each general partner or managing member.
- Schedule of Liabilities (Form 2202).
Additional information may be requested, which an applicant has seven days to submit. Examples of such additional information are:
- Completed information for affiliated businesses.
- 2019 financial statements and current year to date financial statements.
- Monthly income and expenses (Form 1368).
The loan application is available here.
The application form, entitled FORM 5, can be found here. Applicants are advised to review the form prior to completing it so you are prepared with the necessary information. Applicant credit scores from Experian will be the sole source of underwriting. If you do not complete the application accurately, you will be denied.
Some frequently asked follow up questions relating to the SBA Disaster Loan include:
Is the SBA Disaster Loan eligible for loan forgiveness?
No. Under the CARES Act, a newly created SBA loan has loan forgiveness as part of its structure, if certain metrics and requirements are met and documented. For more detail on this, see SBA alerts Part Three, Part Four, Part Five, Part Six, Part Eight, Part Nine, Part Ten, Part Eleven, Part Twelve, Part Thirteen, Part Fourteen, and Part Fifteen.
Can I apply for an SBA Disaster Loan if I have credit or cash elsewhere available to my business?
No, if you have a line of credit for your business you must first use those resources.
How long will the term be for an SBA Disaster Loan?
All terms will be 30 years and all payments on these loans will be deferred for 12 months from disbursement date, but interest will accrue; however, on March 15, 2021, the SBA announced that it will defer repayments of EIDL loans for 24 months for loans made in 2020 and 18 months for loans made in 2021, instead of the original 12 month deferral period.
Will I have to personally guaranty the SBA Disaster Loan?
Yes, any person with an interest in the company worth 20% or more must be a guarantor, unless the loan is for less than $200,000, then no personal guaranty is required.
Can I expand my business with an SBA Disaster Loan?
No. Borrowers cannot expand their business, buy assets, make repairs to real estate or refinance long-term debt.
What can SBA Disaster Loans be used for?
Loan proceeds may be used to pay fixed debts (including short-term notes and balloon payments that are due within the next 12 months), payroll, accounts payable and other bills the borrower would have to pay that but for the disaster would have been paid, such as mortgage payments. Landlords and other passive entities are eligible. Agriculture-related entities are eligible, but farmers are not. A borrower cannot pay off another long-term loan with these funds, but may use it to make monthly payments on that debt. Borrowers must maintain proof of how the loan proceeds were used for three years from the date of disbursement.
Am I still eligible for an SBA Disaster Loan if I have no collateral to offer?
Yes, an application for a disaster loan will not be declined solely for a lack of collateral, but it does require the applicant to pledge what is available.
If I already have a loan, how will it be affected by an SBA Disaster Loan?
Each applicant must review any current loan obligations and confirm that it does not include a provision forbidding that applicant from acquiring additional debt. If the document does, the applicant will want to discuss a waiver of that provision with its current lender. The lender should be amenable to this waiver and the applicant will want the waiver verified in writing. Why would the lender agree? Because the SBA Disaster Loan can be used to satisfy monthly debt obligations and any collateral taken by the SBA would be subordinate, if the same collateral secures the lender’s loan.
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