Congratulations – Your SBA Loan Got Approved… Now What?!
In response to the economic nosedive of 2020 and the aftermath of that ensued during the onset, peak, and re-peak of the COVID-19 pandemic, Congress thankfully passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to support small businesses and individuals. This huge stimulus package was intended to keep small businesses afloat through the uncertainty that still lies ahead via Small Business Association (SBA) loans. The SBA is part of the US department of commerce that is designed specifically to assist small businesses with funding and other business-related needs.
By now many small businesses are preparing to or have applied for one of these SBA loans. This blog will serve as intro course to SBA loans, what they are, and how you can apply.
Let’s get to it.
What does this mean for your company?
Use this calculator to determine the loan size your organization is eligible for, and how much forgiveness is possible. Now, this point is critical. The funds must be used for specific purposes:
- Payroll costs, including healthcare (for current employees and those you had to furlough), payroll tax, and state unemployment insurance; all for W2 employees only.
- Interest on debt, mainly mortgages
- Group health insurance premiums
Remember, if you knowingly use the loan to pay for anything not listed above, you may be charged with fraud. Bottom line: get specific rules from your lender. Also, if you don’t use the funds properly, you may not be eligible for loan forgiveness.
Wait. Tell me more about forgiveness.
According to the US Senate Committee on Small Businesses & Entrepreneurship, borrowers receive loan forgiveness for, “up to 8 weeks of payroll based on employee retention and salary levels, no SBA fees, and at least six months of deferral with maximum deferrals of up to a year.”
Use this calculator to determine how much forgiveness your organization may be eligible for. We also strongly recommend contacting a CPA to maximize the forgivable amount. The Department of Treasury and SBA continue to make clarifications on loan forgiveness. It is your job to make sure you know the rules.
Approved? This is what to do next.
After your loan is approved, talk to your lender about the next steps. To earn forgiveness, you must diligently document how you spend the money. The Senate says you must provide this paperwork to prove compliance:
“Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings.
Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities.
Certification from a representative of your business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use.”
If you have not applied for a loan yet, there is still time. But not every business can participate. Here are a few more critical elements to the program.
What types of businesses are eligible?
Companies with fewer than 500 employees can apply for a loan. The business must have been operating on February 15, 2020.
What about individuals?
The loan also applies to sole proprietors, independent contractors, and people who are self-employed.
Who is not eligible for a loan?
Some organizations and individuals cannot participate. They include:
- Businesses with 500 or more employees
- Financial services businesses and lenders
- Businesses that have defaulted other federal loans
- Businesses whose owners and/or partial owners are currently indicted or arraigned, are on parole for a criminal charge, or were convicted of a felony within the last five years
- Businesses dealing in cannabis or are otherwise illegal at the federal level
- Businesses that engage in a pyramid scheme
- Startups backed by venture capital firms with 50% or more ownership may require counting both employees and those of the VC firm and its other portfolio companies
- Household employers (e.g., nannies or housekeepers)
Is there a limit on allowable funds to borrow?
Yes. The maximum a small business can borrow must be the lesser between 2.5 times the average monthly payroll costs or $10 million.
What are the types of SBA loans available for your business?
Beyond PPC loans, there are other SBA loans available for small businesses in the US and US territories. There are three types of SBA loans: 7(a) loans, 504 loans, and microloans. Here’s what you need to know about each of these SBA loans.
This is the most common type of SBA loan available through the government. The 7(a) federal loan program lends financial assistance to smaller businesses with specific needs and specialized operating requirements. These loans are both approved and advised to be used for real estate purchases by small businesses but the funding can also be used to assist with:
- Operating funds for the short and long-term
- Refinancing business debt
- Purchase office needs including furniture, fixtures, and supplies
A 7(a) loan amount maxes out at $5 million and there are some key eligibility criteria including how your business receives its income, your business credit history, and where your business operates within the US.
Beyond these general eligibility criteria, your business must also meet these criteria to be approved for a 7(a) SBA loan:
- Your business must be for-profit
- Be classified as a small business under the SBA definition
- Actively operate in the United States or a US territory
- Be equity healthy
- Be in good standing with any and all debt to the US government
Some final kickers of the 7(a) loan eligibility include being willing to or already have used personal resources before applying for a 7(a) loan, your ability to prove that your business in fact needs the loan, and you must be planning to use your financial assistance for a sound business purpose, preferably one that would extend the longevity or effectiveness of your business.
This SBA loan program is known as either a CDC loan or a 504 loan. It offers long-term financial assistance at a fixed interest rate for funding of up to $5 million to be spent on major fixed assets that drive the growth of your business including hiring expenses.
A 504 loan is offered through Certified Development Companies (known as CDCs), not the federal government itself. CDCs are commercial partners of the federal government who regulate nonprofits and spur economic growth and development within their local communities. All CDCs are certified and regulated by the SBA federal function of the Department of Commerce.
To be eligible for a 504 loan you will need to meet the following eligibility requirements:
- Operate on a for-profit basis
- Have a business net worth of no more than $15 million
- Generate a net income of less than $5 million after federal business taxes for at least two years before applying for financial assistance
Microloans are small federal loans for small businesses who need no more than $50,000. They are available for both for-profit and specific not-for-profit child care centers looking to start or expand services. It’s important to note that $50,000 is the absolute max for microloans, with the average SBA approved loan amount being just $13,000.
Microloans are funded through nonprofit community-based organizations who have been designated as intermediary lenders to disburse federal funding throughout their community. Though microloans are federally funded, your business would repay the intermediary lender, not the Small Business Administration (SBA).
Eligibility for microloans is determined by the individual intermediary lenders, but generally they require some sort of collateral as a down payment and a personal guarantee from you as the business owner that you will repay your loan.
You can use your microloan for a wide range of purposes to expand your business including:
- Operating capital
- Inventory restock
- Office needs like furniture, rent, and utilities
- Machinery and equipment
If you are interested in acquiring a microloan, you will need to do some research on intermediary lending organizations in your area to find the right one to apply to and request funding from.
Read this guide and checklist from the US Chamber of Commerce. If you decide to apply for the SBA loan program, at a minimum, use the SBA calculator to determine how much loan forgiveness you may receive on your PPC loan. Consider contacting an attorney or accountant to plan for the influx of funding. The SBA loan is a life preserver to many organizations, but it is imperative that each business uses the funds responsibly to avoid penalty and maximize the opportunity for forgiveness.
We want to help make your new normal easier to manage. If you need help with your newly funded hiring strategy – we are ready to find your new talent. Contact us today to Hire Today.
It’s important to remember that you should always consult with your attorney or financial advisor for the best possible financial advice for your organization. This is a good introduction to SBA loans, but seeking professional legal and financial advice is the best way to ensure you are legally protected and set up for success.