Small Business Loan Options You Should Know About Right Now

The social distancing measures designed to slow the spread of the coronavirus have left many small business owners struggling to survive the economic impact.

The government stepped in with a lifeline to small business owners and their employees through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Passed on March 27, the law set aside $350 billion in forgivable loans that small businesses could use to pay employees, rent and utilities.

But by April 16, the SBA had approved more than 1.6 million loans, depleting the funding before many small businesses were able to get loans.

As a result, the government has added more funds to the program, part of additional stimulus passed by Congress and signed into law by the president last week. The SBA resumed accepting applications from participating lenders on Monday, April 27.

The new law allocates an additional $310 billion in funding to the PPP, which stipulates that $60 billion is reserved for community banks and small lenders; it also assigns another $10 billion for economic injury disaster loans.

While PPP is a great option — primarily because some or all of the loan could be forgivable if you meet certain requirements — the demand is high, and funds could run out quickly, so it’s good to know what other options you have. Here’s what you need to know about the PPP and other small business loan options available right now.

Paycheck protection program loan

Administered by the SBA, the purpose of the Paycheck Protection Program is to establish forgivable loans of up to $10 million for small businesses – generally, those with 500 employees or less -- that retain most of their employees. The funds are meant to help replace some of the revenue that is being lost while so many businesses are closed or otherwise affected by the pandemic.

Applicants should keep in mind that these loans:

• Need no collateral.
• Have limited use, and at least 75 percent must be used to cover payroll.
• Must be repaid in two years if not forgiven, and charge 1% interest.
• Generally require that employees be kept or replaced by June 30, 2020, and that their pay not decrease by more than 25 percent (proof of payroll is required) for the loan to be forgiven.
• Require the borrower to certify that the current economic uncertainty makes the loan necessary to support ongoing operations.

Visit the SBA’s website for a comprehensive summary of the program.

Bottom line: High demand may put this option out of reach for many applicants but Congress may allocate more funding to this program in the coming months.

Economic injury disaster loan (EIDL)

The SBA’s EIDL program has been around for some time. However, the CARES Act has relaxed some of its traditional stipulations and expanded the program to include a $10,000 grant component for businesses that are currently experiencing temporary difficulties.

You should know these key points:

• You must qualify as a small business by having fewer than 500 employees. Some businesses may have more than 500 employees if they meet the SBA’s size standards for those industries.
• You have more flexibility on how to use these funds versus PPP funds.
• The normal EIDL application has been streamlined to speed up the process.
• The maximum loan is $2 million, with the exact amount based on economic injury suffered.
• Loan amounts over $200,000 require a personal guarantee.
• The maximum loan term is 30 years.

Bottom line: This is a good option if you don’t need to borrow more than $2 million. Despite the streamlined application, processing time may still take several weeks due to the high demand.

Traditional SBA 7(A) loan

Small business owners can still apply for standard SBA loans but should be aware that a bank’s capacity to process them might be limited or subject to delays at this time. Standard SBA loans are a viable option for those who don’t qualify for the PPP or are awaiting possible funding from it. These types of loans:

• Generally require collateral to qualify for loans over $25,000;
• Take more time to fund than conventional loans;
• Have lower rates than conventional business loans.
• The maximum loan term is often 10 years.

In addition, the SBA Debt Relief program is automatically suspending payments for all current and new borrowers for a six-month period. This includes principal, interest and fees for only the following: 7(a) loans, 504 loans (a different SBA loan program specifically for local economic development) and microloans issued before September 27, 2020.

Bottom line: These popular loans can be used for a wide variety of purposes and have low interest rates. Overwhelming demand may add to the processing time, which is typically several weeks.

SBA express bridge loans

Formed in 2017, the Express Bridge Loan Pilot Program (EBL) offers small businesses that currently have a business relationship with an SBA Express Lender the opportunity to quickly receive funds to bridge the gap in its loss of revenue while applying for a direct SBA Economic Injury Disaster loan. The program originally provided loans of up to $25,000 to small businesses in communities suffering from presidentially declared disasters or SBA-declared disasters.

On March 25, the agency expanded its program eligibility to small businesses across the country that have sustained financial loss because of COVID-19. Normally, EBL loans can only be distributed for up to six months after the date of a presidential disaster declaration but the COVID-19 program expansions allow loans to be made through March 13, 2021.

• The maximum loan term is seven years.
• Lenders have discretion to allow a longer term if the borrower doesn’t receive long-term disaster financing.
• The loan will be repaid in full or in part by proceeds from the EIDL loan.

Bottom line: These loans are a great option for applicants who qualify for standard EIDL loans but need some funds quickly.  

Conventional loan

Conventional bank loans are another option for small business owners and they can also be used for a wide variety of things, making them less restrictive than most SBA loans. It can be more difficult to qualify, but if you do, the funding may come with fewer strings attached. Key points to know include:

• The rates are likely to be higher than SBA 7(a) loans.

• The funding is typically faster than for SBA 7(a) loans.

• You will need to put up collateral to qualify.

Bottom line: Qualifying for standard bank loans can be more difficult than for SBA loans. The rates tend to be higher and you’ll need to put up collateral, but they come with fewer restrictions and tend to provide funding much faster.

Employee retention credit

The Employee Retention Credit under the CARES Act is a refundable tax credit implemented to help businesses keep their employees on payroll. 

The tax credit cannot be used if an employer gets a PPP loan. Businesses that have been hurt by COVID-19 can claim a 50 percent tax credit for up to $10,000 in wages for each employee between March 12, 2020 and January 1, 2021. To qualify, a business must be fully or partially suspended due to the government order or make less than 50 percent of its comparable quarterly earnings. The credit offsets payroll taxes the employer is required to pay to the federal government, and can be refunded by filing with the IRS a Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Bottom line: This tax break is available to employers who do not receive any funding from the PPP program but have kept most of their employees on their payrolls despite seeing their business significantly reduced due to the coronavirus pandemic.

Other funding sources

Small-business owners can also pursue other forms of financial assistance, such as resources from state, local and private sources. Payroll company Gusto has complied a blog of potential relief sources, which includes a regularly updated spreadsheet of available programs across the country.

Facebook is also sponsoring a Small Business Grants Program and GoFundMe has partnered with Yelp, Intuit QuickBooks, GoDaddy and Bill.com to create the Small Business Relief Initiative to provide small business owners with financial support and resources. Individuals and small business owners may also create their own GoFundMe pages to solicit donations.

Bottom line: One positive of the current crisis has been the outpouring of charity and goodwill from individuals and the private sector — those who ask for help just may receive what they need.

Deciding to take on a new loan is always a difficult and important business decision, so consult with your accountant or attorney about whether any of these loans are right for you. If you need to access cash now, a financial advisor may also be able to help you weigh options you hadn’t thought of.

This publication is not intended as legal or tax advice.  Financial Representatives do not render tax advice.  Consult with a tax professional for tax advice that is specific to your situation.