How Small Businesses Can Get Post-Pandemic Help From The SBA
This week, President Biden touted his American Rescue Plan and its impact on the economy. He said in an address on Thursday, Sept. 16, that over the last three months, the economy has created 750,000 new jobs per month on average and that it is growing at the fastest rate in nearly 40 years. He also said that the United States is the only developed country in the world whose economy is now bigger than it was before the pandemic.
Despite this rosy outlook, challenges for the economy still loom. The emergence of COVID’s Delta variant, lingering supply chain issues, and bad actors seeking to profit off the pandemic are all contributing to the challenges that the American economy is facing.
The President claims that leading economists, forecasters like Moody’s, and major international financial institutions, believe his plan will create jobs, grow our economy and lessen inflationary pressure. He also said that 15 Nobel laureates in economics released a letter in support of his agenda, which “invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease long-term inflationary pressures.”
According to independent fact-checkers at PolitiFact, there is broad agreement that Washington should spend hundreds of billions of dollars to corral the coronavirus, help small businesses and give assistance to the millions of people who lost their jobs. However, PolitiFact said that the President has treated that support as an endorsement of his entire $1.9 trillion plan and that many prominent economists have concerns about the price tag.
Access to Capital
In the post-PPP era, capital is flowing into the hands of small business owners, albeit much more slowly than it had been before the COVID pandemic hit. Small business loan approval percentages at big banks ($10 billion+ in assets) jumped from 13.8% in July 2021 to 13.9% in August, up by three-tenths of a percentage from one year ago, according to the latest Biz2Credit Small Business Lending Index™.
Meanwhile, small banks’ approvals also rose from 19.1% in July to 19.3% in August. The approval percentage at small banks is up eight-tenths of a percent from last year. Small businesses are again borrowing to improve their cash flow and for growth.
But just how far have bank loan approval percentages fallen?
In February 2020, just before COVID shut down the economy, big banks were approving 28.3% of loan applications, while small banks approved more than half (50.3%) of funding requests. Thus the approval rates are now half as high as they were during pre-pandemic times.
Institutional lenders approved to 24.3% in August, up from 23.9% of funding requests in July and up 2.2 percentage points from one year ago. In sharp contrast, in February 2020, institutional lenders funded almost two-thirds (66.5%) of the requests they received.
Alternative lenders (merchant cash advance firms, factors, and others) continue to be a good source of capital for small business owners. They typically focus less on FICO scores and more on the financial health of the borrowers who are applying for funding.
The SBA continues to help small businesses recover from COVID-related hardships through its Economic Injury Disaster Loan (EIDL) program. The loans are made directly from SBA and – unlike PPP funding – must be repaid. An EIDL loan is a low-interest, fixed-rate, long-term loan to help overcome the effects of the pandemic by providing working capital to meet operating expenses.
Related: The Government Can Incorporate The Lessons Learned From PPP Into Future Programs
The funding can be used as working capital to make regular payments for operating expenses, including payroll, rent or mortgage payments, utility bills, and other ordinary business expenses. An EIDL loan can also be used to pay business debt incurred at any time. The maximum EIDL amount is $2 million, and the SBA will begin approving loans greater than $500,000 on October 8, 2021. EIDL loans come at a term of 30 years and at a fixed interest rate of 3.75%. (The rate for private, nonprofit organizations is 2.75%.)
Payments are deferred for the first 2 years (during which interest will accrue), and payments of principal and interest are made over the remaining 28 years. There is no penalty for prepayment and no fee for loans $25,000 or less when applying directly through the SBA.
For loans greater than $25,000, there is a one-time $100 fee for filing a lien on borrower’s business assets plus costs to file lien on real estate when applicable. For loans greater than $500,000 in which the SBA is taking real estate as collateral, there is a one-time of $100 fee for filing a lien on borrower’s business assets. Additionally, the borrower will be responsible for recording the real estate lien and paying the associated fees.
Collateral is required for loans greater than $25,000, and a personal guaranty is required for loans greater than $200,000.
If the small business is a first-time COVID EIDL applicant, the owner of the business must complete the following steps to apply:
- Confirm eligibility;
- Complete Intake Form;
- Sign up to create portal username via SBA email invite;
- Complete portal steps and submit relevant documents; and
- Respond to SBA requests for signature, confirmation, and documents.
The average SBA decision timeline for $500,000 or under is several weeks. The SBA has published a set of FAQs to help prospective borrowers assess their eligibility for EIDL funding.