As many businesses enter uncharted territory as the coronavirus pandemic reaches new heights, we have received numerous inquiries regarding the Economic Injury Disaster Loan Program. This update will address three questions: (1) When will the funds be available to Ohio businesses under the Economic Injury Disaster Loan Program, (2) Who classifies as a “small business?” and (3) is collateral required?
When Will SBA Disaster Loan Funds Be Available?
There are no SBA disaster loan funds available for Ohio businesses now, and it may be a few weeks before SBA disaster loans are available, but Ohio small businesses should be taking the steps now to see if they may qualify and get their applications and necessary paperwork in order once SBA begins accepting applications. The regional director of the Cleveland District Office of the SBA expects businesses to be able to apply for Economic Injury Disaster Loans by the end of the week (March 20th, 2020). The SBA just announced the first set of designated states and territories that are eligible for Economic Injury Disaster Loan, including the entire state of California, Washington D.C. and certain surrounding counties, and certain counties in Massachusetts, New York, North Dakota, Wyoming, Arizona, Idaho, Oregon, Wyoming, Colorado, Rhode Island, and Connecticut.
Separately, there is concern that the SBA does not currently have the resources and authorization to adequately meet the needs of American small businesses. The Coronavirus Act could enable the SBA to make up to $7 billion in disaster loans, but that bill was passed at a time when there were no state or city-wide mandatory shut-downs of certain businesses. Lawmakers have begun to recognize that the SBA will need to significantly expand its existing programs, including Section 7(a) loans, to stabilize American small businesses based on the scale of the crisis. Sen. Marco Rubio proposed a bill that would increase the Section 7(a) loan program by $50 billion. Others are concerned that the existing SBA disaster loan process is not efficient enough to meet the urgency of the crisis and the SBA needs to rely on the private sector to help process coronavirus disaster loans, similar to 7(a) direct loans.
We expect there to be further legislation and regulations in the near future. The SBA has not yet laid out the guidelines for how loans will be evaluated and processed under the approved Economic Injury Disaster Loan Program, and will need to continue to provide additional rules and regulations on how the disaster loan relief will be granted. The vast majority of disaster loans previously made by the SBA have been to individuals or businesses for property damage caused by natural disasters. We expect the majority of disaster loans in the coronavirus pandemic to be Economic Injury Disaster Loans, which can be more complex to underwrite and process.
Businesses may want to contact the following references for additional guidance: Cincinnati USA Regional Chamber: (513) 579-3111 or email@example.com; and Hamilton County Business Development Center: (513) 631-8292 or https://hcdc.com/contact-us/; or your specific lender if you have an existing loan under the SBA’s 7(a) lending program.
Who is a Small Business?
In order to qualify for an SBA loan, businesses must satisfy SBA’s size standards for small business, which is determined on an industry-specific sliding scale based on the annual receipts or revenues of the business or in some cases, the number of employees. Businesses should review the sliding scale to see if they could potentially qualify. Annual receipts vary widely by industry. Here are a few examples of the annual receipts maximum to be classified as a small business by the SBA for certain businesses likely affected by COVID-19:
- Restaurants and bars: $8 million;
- Hotels: $35 million;
- Child day care services: $8 million;
- Caterers: $8 million.
- Fitness and Recreational Sports Centers: $8 million.
- Retail Stores: $8 million – $41.5 million, depending on the type of merchandise sold
Note that businesses must include the receipts of any affiliates in such calculation.
In addition, to qualify for SBA loans, businesses must meet the SBA’s definition of a small business concern, which requires the business is:
- Organized for profit;
- Has a place of business in the U.S;
- Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor
- Is independently owned and operated; and
- Is not dominant in its field on a national basis.
The business may be a sole proprietorship, partnership, corporation, or any other legal form. In determining what constitutes a small business, the definition will vary to reflect industry differences, such as size standards.
Is Collateral Required?
Unless Congress or the SBA changes the rules with respect to COVID-19 disaster loans, collateral will be required for all loans over $25,000, which may be lien on the damaged or replacement property, a security interest in personal/business property, or both. The SBA will not decline a loan if a borrower lacks sufficient collateral so long as the SBA is reasonably sure the borrower can repay its loan. However, the SBA requires borrowers to pledge what is available and may decline or cancel loans if a borrower refuses to pledge available collateral.
The KMK Law team identified below is happy and eager to assist Ohio businesses and non-profits in expediting the SBA loan and application process and will keep Ohio businesses and non-profits apprised of further details with the SBA disaster loan program as they are released.
KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.
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