Understanding the SBA disaster relief loan program for COVID-19
As funding and application guidelines for the SBA disaster relief grants and loans program change, visit our Coronavirus Resource Center for our latest information and guidance. You can also contact our national SBA loan task force or your CohnReznick engagement team for assistance with filing for these loans and providing required financial documentation.
The Small Business Administration (SBA) is extending its disaster loan programs to businesses and nonprofits including charitable organizations such as churches and private universities impacted by COVID-19. Businesses can qualify regardless of whether they have suffered property damage, and can use the funds to help meet working capital needs and cover operating expenses as they recover from the pandemic’s impact.
The SBA said in a release that its Office of Disaster Assistance will coordinate with state or territory governors to submit requests for Economic Injury Disaster Loan assistance. Once a declaration is made, the information on the application process for Economic Injury Disaster Loan assistance will be made available to affected small businesses within that area. The SBA and state governors plan to speed the application and loan grant process so funds can be rapidly dispersed to qualifying businesses in need.
- Your business must be experiencing a business loss related to COVID-19. The business receiving the loan must be deemed a Small Business based on North American Industrial Classification System (NAICS) code, annual receipts, and the average number of people employed per pay period. Learn more about the SBA's size standards.
- According to SBA’s guide to size and affiliation rules, when calculating the size of your business, you must include the annual receipts and employees of your domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. Applicable affiliation rules from the guide include:
o Affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses.
o Control can be established through ownership, management, or other relationships or interactions between the parties.
o Both affirmative and negative controls are considered. Negative control includes when a minority shareholder has the ability under charter, by-laws, or a shareholder's agreement to prevent a quorum or block action by the board of directors or shareholders
- Current SBA loans will not preclude an applicant from being eligible for Disaster Relief Loans; however, businesses need to be in good standing with the SBA. Applicants may not be eligible if they have not complied with the terms of previous SBA loans.
- The SBA must find that applicants have an acceptable credit history.
- Usage: Funds made available must be used for certain purposes. Acceptable purposes include working capital, paying fixed debts, payroll, accounts payable, and paying other bills that could have been paid had the disaster not occurred. It is NOT acceptable to use loans to replace lost sales, enhance profits, refinance long-term debt, or fund expansion opportunities.
- Loan limitations: The statutory limit of SBA loans is $2 million. The amount of each loan is further limited to the economic injury determined by SBA after subtracting business interruption insurance and other capital recoveries up to the administrative lending limit. The SBA will also consider potential contributions that are available from the business and/or its owner(s) or affiliates. can waive the $2 million statutory limit if the business is a major source of employment.
- Interest Rate: The interest rate for small businesses is 3.75% and for private nonprofit organizations is 2.75%.
- Maximum loan term: The maximum term is 30 years; however, terms are determined on a case-by-case basis based on each borrower’s ability to repay.
- Collateral: The SBA requires collateral for all loans over $25,000. Real estate is acceptable as collateral. SBA has said it will not decline a loan for lack of collateral, but it will require the borrower to pledge collateral that is available.
- Economic injury: If applying for disaster declarations related to the coronavirus outbreak, only select “Economic Injury” when inquiring about your business losses.
- Online: The fastest way to apply is online at https://www.sba.gov/page/disaster-loan-applications
- Mail: Printed applications are available here.
As listed on the application, the SBA will require the following documents to be submitted:
- The application (SBA Form 5), completed and signed.
- Tax Information Authorization (IRS Form 4506T) completed and signed by each applicant, each principal owning 20% or more of the applicant business, each general partner or managing member, and any owner who has greater than 50% ownership in an affiliate business.
- Complete copies, including all schedules, of the most recent federal income tax returns for the applicant business; an explanation if not available
- Personal Financial Statement (SBA Form 413) completed, signed, and dated by the applicant, each principal owning 20% or more of the applicant business, and each general partner or managing member
- Schedule of Liabilities listing all fixed debts (SBA Form 2202 may be used)
Additional financial information may be required if requested, including:
- Complete copy, including all schedules, of the most recent federal income tax return for each principal owning 20% or more, each general partner or managing member, and each affiliate when any owner has more than 50% ownership in the affiliate business
- If the most recent federal income tax return has not been filed, a year-end profit and loss statement and balance sheet for that tax year
- Additional Filing Requirements (SBA Form 1368) providing monthly sales figures will generally be required when requesting an increase in the amount of economic injury.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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