Has your small business faced financial pressure due to the coronavirus pandemic? The U.S. Small Business Administration (SBA) has promised to make disaster loans available for businesses in affected areas. Here’s how the loan works, who qualifies, how to apply—and how to get your loan forgiven if you default.
What is the SBA disaster loan program?
The SBA disaster loan program specifically serves people affected by natural disasters in the U.S. Normally, you don’t need to be a small business to apply; homeowners and renters also qualify. But if you’re looking for COVID-19 relief, you’ll need to be a small business or non-profit.
You can borrow up to $2 million if your business is physically affected by a disaster (such as a hurricane or earthquake), or $2 million for economic injury. The SBA is offering the latter to small businesses affected by coronavirus and the resulting economic slowdown.
If you qualify, the interest rate for an SBA disaster loan is 3.75% for businesses, and 2.75% for non-profit organizations. SBA loans have fairly long terms—generally 15 to 30 years—in order to make them affordable for small businesses.
How can you spend your loan?
Your loan is meant to give you working capital to keep your business running during the pandemic. You can use it to cover payroll, make interest payments, pay rent—the SBA isn’t picky. Once you qualify for a loan, it’s up to you to decide how you use it to fill the gaps in your revenue.
Further Reading: SBA Loans: A Complete Guide
Who qualifies for an SBA disaster loan?
You can apply for an Economic Injury Disaster Loan (EIDL) if you have no credit otherwise available (meaning, you don’t qualify for other loans), and your business has suffered severe economic hardship because of the pandemic.
Also, independent contractors who work for a separate business (eg. real estate brokers) can qualify if they’re able to prove they’re separate from that business (eg. the brokerage).
Currently, businesses in all U.S. states and territories are eligible to apply.
How to apply for an SBA loan
You can apply for a loan through the SBA’s Disaster Loan Assistance portal.
When you apply, be prepared to provide the following:
- General business information (name, location, SSN, contact info)
- Your annual income statement for 2019, plus 2020 monthly income statements up to the present date (your bookkeeper should be able to provide these)
- Complete copies, including schedules, of the most recent federal income tax returns for the principals of your business (general partners, or 20%+ shareholders in corporations). Be prepared to provide an explanation if you can’t provide these.
- A completed copy of the application (SBA Form 5)
- A schedule of liabilities listing all debts (SBA Form 2022)
- A request for a transcript of your tax return (SBA Form 4506-T)
- A personal history statement (SBA Form 912)
- A personal financial statement (SBA Form 413)
- Copies of relevant business certificates or licenses
- A copy of your business lease
- A history of previous loan applications
- Information on collateral property (eg. real estate, equipment) if needed.
In order to get an annual income statement, you’ll need up-to-date bookkeeping done. If you’re behind on your bookkeeping and you’re not sure how you’ll get financial statements together, Bench can help. We’ll do your catch-up bookkeeping at a discounted rate and get you all the financial statements you need to apply.
Have any questions at all about financing, bookkeeping, or taxes? Reach out to a Bench small business expert for a free consult. Learn more.
Once you apply, a loan officer will check your credit rating. Then they’ll check your income statements and tax returns to determine how badly your business needs the loan.
For loans over $25,000, the lender can require you post collateral. For loans under $25,000, you have the option of offering collateral if you believe it will increase the chances you’ll qualify for a loan, but the lender can’t request it.
That being said, the SBA won’t deny you a loan if you’re unable to come up with enough collateral; they’ll assess what you’re able to offer, and then take that as posted collateral.
After that, they’ll decide how much they’ll lend you.
How do I get my SBA disaster loan forgiven?
It’s uncertain what future measures, if any, the federal government will take to relieve business debt. As the response to the coronavirus pandemic develops, you may have more options available for getting your loans forgiven. But here is the way SBA loan forgiveness has typically functioned up to this point.
First, your business needs to shut down and dissolve. The SBA does not forgive the debt of businesses that are still in operation.
Once the bank has determined you won’t be able to pay back your loan, the SBA will step in to work with them.
The SBA will pay off 50-75% of your debt to the bank.
At this point, you can offer to pay off as much of the remainder of the loan to the SBA as you can. They can choose to accept or deny this offer.
If the SBA accepts your offer, they’ll set up an arrangement with you so you can pay back the loan in a timely manner.
After they pay off 50-75% of it, if the SBA doesn’t accept your offer to pay a portion of the remainder, they may move on to collection actions.
They’ll either use the Treasury Offset Program (TOP), or send you to the Fiscal Service department.
With TOP, any future tax refunds owed to you by the federal government will be taken to cover your debt to the SBA.
With Fiscal Service, the SBA may hire debt collectors, send collection letters, forward information to credit agencies, garnish wages, or even bring your debt to the Department of Justice to seek criminal prosecution.
Contacting the SBA
To get in touch with the SBA’s disaster loan customer service center, email firstname.lastname@example.org, or phone (716) 843-4100.
Other COVID-19 resources
- The Express Bridge Loan Pilot Program (A Simple Guide)
- Six Steps to Take If COVID-19 Shuts Down Your Business
- COVID-19 Resources for Small Businesses, State by State
- Leading a Small Business Through a Recession: Five Best Practices
- Getting Through COVID-19: A Financial Game Plan for Small Businesses
- The Coronavirus Relief Bill: Every Benefit for Small Businesses
- Paycheck Protection Program: A Simple Guide
- The CARES Act: A Simple Summary