Prior to COVID-19, the Small Business Administration’s most significant disaster recovery participation came in the aftermath of Hurricanes Katrina and Rita when it provided just shy of $11 billion in disaster loans to approximately 160,000 loan recipients. Since its establishment in 1953, the SBA has administered nearly $60 billion in disaster loans. Incredibly, in just about 21 days in April and May, it has approved 3.8 million loans totaling over $500 billion. That is more than eight life-spans of SBA disaster lending in three weeks. For many, the PPP loan simply isn’t enough to survive the prolonged shut down of the U.S. economy. But, there are old and new loan options that may assist you during the recovery.
Life After PPP
The well touted and at times confusing Paycheck Protection Program has been in existence a mere five weeks – yet, for many it seems like a lifetime. By now, many companies that elected to participate in the PPP are mining through the guidance on how to properly spend their loan proceeds. In practicality, the PPP loan is acting as a pass-through for companies to maintain employee headcounts and payroll expenses during the uncertain market conditions in exchange for loan forgiveness. While the PPP carries significant benefits to employers and employees alike, it does carry strict limitations and doesn’t provide any stability into the next phase of this economic and health crisis. But, it wasn’t meant to. It was designed to help keep the status quo as much as possible during the shut-down and re-open period (through June 30, 2020). The good news, if you haven’t yet applied, is that funds still remain available and most lenders continue to participate in the program. And for those businesses that are now looking to other sources of liquidity to assist in mid to long-term survival, they do have options to consider.
Available SBA Programs
Importantly, several existing loan programs remain available (subject to appropriations), such as the Economic Disaster Loan Program (EIDL), 504 Loan, SBA 7(a) Loan and SBA Bridge Loan. Each program targets a different need and has different benefits. While you cannot use SBA loans for the same uses, it may be possible to match these loans to fit your specific needs. Here is a brief summary of each of these programs.
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STANDARD SBA LOANS |
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|---|---|---|---|---|
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(EIDL) |
Express Bridge Loan |
7(a) Loans |
504 Loan |
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Where to apply? |
SBA |
Participating Lenders |
Participating Lenders |
Participating Lenders |
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Are you eligible? |
Businesses with less than 500 employees as of Jan. 31, 2020. Businesses excluded in 13 CFR 120.110 are not eligible, except 501(c)3’s |
“Small business concerns” in operation before March 13, 2020 adversely impacted by COVID-19. |
“Small business concerns” as defined by the SBA regulations. |
“Small business concerns” as defined by the SBA regulations, including the alternative size standard. |
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What can I use the loan for? |
Reoccurring obligations related to COVID-19, such as payroll, contractual obligations, utilities and rent. |
Working capital to cover operational expenses to support survival or reopening of business |
Variety of eligible facilities: Real estate and equipment, working capital or seasonal lines of credit |
Primarily fixed assets |
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What are the loan terms? |
Up to 30-year term 3.75% interest for businesses 2.75% for nonprofits |
Up to 7 years Up to 6.5% over prime rate |
5-10 year term ~5-8% interest |
10-25 year term; fixed interest rate correlated with the current market rate for 5-year and 10-year U.S. Treasury issues |
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What is the loan amount? |
$2M (max) (currently paused) |
$25,000 (max) |
$5M (max) |
$5M (max) |
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Website |
SBA 504 Loans |
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Will the Main Street Lending Program Help Me?
In an effort to loosen up the credit markets and provide flexibility to lenders and borrowers alike, the Federal Reserve Bank, in conjunction with the Treasury Department, announced the Main Street Business Lending Facility Program. This program is intended to encourage private lenders to extend full-recourse non-forgivable loans to small and mid-sized businesses in response to COVID-19. At a high level, the Federal Reserve Bank is offering three separate term facilities to lenders and will buy 85-95% of qualified loans to back-stop lending decisions. Here is a summary of each facility:
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MSNLF |
MSPLF |
MSELF |
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Term |
4 years |
4 years |
4 years |
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Loan Size |
$500,000 - $25M |
$500,000 - $25M |
$10M - $200M |
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Debt Limitation (drawn and undrawn debt) |
4x’s Adjusted EBITDA |
6x’s Adjusted EBITDA |
6x’s Adjusted EBITDA; and < 35% of All Debt |
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Lender Risk Retention |
5% |
15% |
5% (Upsize Tranche) |
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Payment (Year One Deferred For All) |
Years 2-4: 33.33% each year |
Years 2-4: 15%, 15%, 70% |
Years 2-4: 15%, 15%, 70% |
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Rate |
LIBOR +3% |
LIBOR +3% |
LIBOR +3% |
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Origination Fee |
100 Basis Points |
100 Basis Points |
75-150 Basis Points |
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Treatment of Employees |
Commercially Reasonable Efforts to Retain Employees |
Commercially Reasonable Efforts to Retain Employees |
Commercially Reasonable Efforts to Retain Employees |
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Rehiring of Employees |
Not Required |
Not Required |
Not Required |
Similar to other federal loan programs, there are eligibility perimeters, required certifications and restrictions on the utilization of the funds. Those include the following:
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Eligibility |
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Certifications |
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U.S. business established prior to 3/13/20 |
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Ability to pay obligations |
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15,000 or less employees or revenues of $5b or less |
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Commercially reasonable efforts to maintain payroll and retain employees |
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Not-Eligible |
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Restrictions |
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Financial businesses |
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Cannot prepay or cancel pre-existing loans and lines of credit (except MSPLF) |
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Passive real estate businesses |
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Executive compensation caps |
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Non-Profits |
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Prohibition on stock buybacks |
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Government Owned Businesses |
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Prohibition on dividends |
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13 CFR 120.110 Prohibited List |
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Time to Think About Long-Term Resiliency
As you wade through PPP compliance and various health and legal requirements for re-opening your businesses, now is the time to implement your long-term financial resiliency plan. In doing so, you should communicate with your lender and determine if they are participating in these federal loan programs and obtain information on their process to apply for underwriting consideration. You should expect a complete underwriting process and begin to prepare documentation that you would expect to provide for any loan application. While Congress considers its next steps for additional relief and stimulus assistance, these programs may be a lifeline to your company to survive or even flourish through the COVID-19 crisis.
Our COVID-19 Task Force will continue to ever-changing landscape of options and issues for businesses to consider as we navigate through the pandemic and beyond.