How Can an SBA Loan Help Your Company Survive the COVID-19 Pandemic?

Federal, state, and local governments have encouraged or forced any nonessential businesses to shut down for the sake of “social distancing” practices. This has put a significant dent in the revenues of businesses throughout the country, with many not having the funds to support their current operations for more than a couple more months. However, due to this impact, the $2 trillion stimulus package passed by congress included $350 billion in aid geared toward small business working capital loans to help businesses survive during the COVID-19 pandemic. The first question that needs to be answered is, what is a working capital loan? Second, how can it help your small business survive in the current economic climate?

What is a working capital loan?

First, we need to define working capital, which is the difference between a company’s current assets, mainly cash and accounts receivable, and its current liabilities, mainly accounts payable, and it is a measurement of a company’s liquidity, operational efficiency, and its short-term financial health. A company’s working capital funds can be used to cover its short-term cost, such as payroll, fixed debts, and accounts payable, which if your business has been shut down or seriously impacted from COVID-19, may be struggling to do at this time.

This is where a working capital loan comes in to help alleviate some of the financial pressure and help businesses keep up with short-term expenses during a time in which little or no revenues are being generated. A working capital loan accomplishes exactly what it sounds like it will, it is an influx of funds to help cover the expenses that a company’s working capital balance typically does. However, these loans are typically not easy to acquire, and often require collateral or a significant personal guarantee by the business owner, but as a result of the stimulus package, more favorable terms are being provided through the Small Business Association (SBA).

How can a working capital loan help a business through the COVID-19 pandemic?

As the government has enforced or encouraged businesses to shut down during the COVID-19 outbreak, companies have been experiencing significant declines in revenues and may be struggling to cover their current expenses. The stimulus package including $350 billion in relief for small businesses by means of SBA loans can help your company stay afloat. The SBA’s Economic Injury Disaster Loans are offering up to $2 million in assistance to help small businesses cover their payroll, fixed debts, accounts payable, and any other bills unable to be paid due to the negative impacts from COVID-19. The interest rate on these loans will be set at only 3.75%, with length and terms being determined on a case-by-case basis.

How to receive part of this financial aid?

One important distinction is that the SBA is not actually a lender. The loan is extended by a bank and the SBA in turn guarantees a portion of the loan, which means you will need to find an approved SBA lender first. After that, any loan that exceeds $250,000 in goodwill requires an independent third-party appraiser, which is where Quantive can help you in the process. The steps to take are:

1. Determine if a working capital loan is something that could help your business
2. Confirm your business qualifies to receive part of the $350 billion in relief for small businesses
3. Find a qualified SBA lender
4. Reach out to Quantive to perform the third-party appraisal
5. Get the funds to help your business survive the COVID-19 pandemic!

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How does the SBA 7(a) Loan Program Apply to the COVID-19 Stimulus Package?

The Senate has approved a colossal $2 trillion stimulus package.  The key feature of the package is a one-time $1,200 direct payment to adults; however, the legislation included numerous proposals for aimed to help small businesses experiencing adverse impacts from the pandemic.  The highlight of the small business relief is a $350 billion small business loan program that will be overseen by the Small Business Administration, which will provide aid to support companies in paying fixed debts, payroll, accounts payable, and any additional bills that are unable to be paid because of COVID-19’s impact.

Who Qualifies?

First, bear in mind that while you may fit into the below criteria, the lender will actually be the one deciding whether they are willing to underwrite your proposed loan.   Here are some of the typical requirements for SBA loans:

  • The business must be “small” as defined by the SBA’s small business size standards
  • The business must not engage in “prohibited activities” – of which there is a laundry list
  • The proceeds of the loan must be used for an eligible purpose

Additional requirements as it relates to the COVID-19 Stimulus are:

  • Prove the Company has been severely impacted by the COVID-19 Virus

Business Valuation Requirements for SBA Loans

All SBA loans that have over $250,000 in goodwill (or “blue sky” as some people say) require an independent, third party valuation.  Some lenders require that all SBA loans receive a third party valuation.  When it comes to the valuation itself:

  • The bank must engage the valuation firm (not the borrower or seller)
  • The person performing the valuation must be “qualified” – more on that in a minute

The definition of qualified has changed some over the years as the SBA has refined its requirements.  Generally speaking, qualified means that the person performing the valuation is credentialed and conducts valuations on a routine basis.  The most recognized qualfied credentials include:

  • Certified Valuation Analysts (CVA)
  • Acreddited Senior Appraiser (ASA)

Note that CPA’s have specifically been excluded from the list of qualified sources unless they have a valuation specific credential.  This makes sense.  Business valuation is a very separate field from accounting, so  unless a CPA is routinely performing valuation work then a CPA credential alone would not qualify someone to perform such work.

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SBA Disaster Assistance in Response to COVID-19

Response to COVID-19

The $2 trillion stimulus passed by the Senate included $350 billion small business loan program that will be overseen by the Small Business Administration. This will include offering low-interest federal disaster loans to provide working capital to small businesses experiencing an adverse economic impact from COVID-19. The highlights and details of the program are as follows:

  • The Economic Injury Disaster Loan assistance declaration issued by the SBA makes loans available statewide to small businesses to help alleviate economic injury caused by COVID-19.
  • SBA’s Economic Injury Disaster Loans will offer up to $2 million in assistance and provide immediate economic support to small businesses to help cover the temporary loss of revenue they are experiencing.
  • These loans can be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact.
  • The interest rate is 3.75% for small businesses.
  • SBA offers loans with long-term repayments to keep payments affordable with a maximum term of 30 years. Terms are determined on a case-by-case basis.

The information below details an overview of the SBA Loan Program in general and its requirements.

SBA Loan Program Overview

The SBA has two primary loan programs. The most commonly used is the 7(a) program – which we focus on here – and the 504 program.   The 7(a) program is frequently used for working capital expansion or to fund the acquisition of an existing business.  In fact, as a business valuation firm, we are most often involved with the SBA 7(a) program in the context of business acquisitions.

One important distinction is that the SBA is not actually a lender.  The loan is extended by a bank, and the SBA in turn guarantees a portion of the loan.  Thus it’s somewhat of a misnomer when someone suggests “getting a loan from the SBA” – as it is only guaranteed by the SBA.

We very frequently hear directly from borrows that are looking to secure an SBA loan, so we thought it would be apropos to provide a quick overview of the program and its key elements.

Eligibility: What Can a 7(a) Loan be Used For?

SBA Loans are provided to businesses, but it is both the character and nature of both the business and the borrowing principles that dictate eligibility.  Key considerations include what the business actually does, as well as the character and creditworthiness of the borrower.

To be eligible businesses must:

  • Operate for profit
  • Be small, as defined by SBA
  • Be a US based business
  • Have reasonable invested equity (Yes, this sounds like a future article, right reader? )
  • Use alternative financial resources, including personal assets, before seeking financial assistance
  • Be able to demonstrate a need for the loan proceeds
  • Use the funds for a sound business purpose
  • Not be delinquent on any existing debt obligations to the U.S. government

Certain types of businesses are declared ineligible by default by the SBA.  While there is actually quite a lengthy list, suffice it to say that if you think the government wouldn’t really want to be involved in a type of business, it’s probably not eligible for the 7(a) loan program.  Some examples of ineligible businesses include:

  • Banks and Lenders
  • Businesses engaged in illegal activities
  • Lobbyists
  • Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting

Requirements

7(a) Loan Limits: How Much?

The 7(a) program has a cap of $5 million.  That being said, many lenders do not consider loans approaching the upper threshold of size limits.  In fact, loans tend average between 300k and 400k.

That being said, some lenders prefer larger loans (and likewise some trend smaller).  It makes sense, then, to understand what the appetite a particular bank has for loans by size before starting the application process.

Proceeds:  What Can You Use a 7(a) loan for?

  • To provide long-term working capital to use to pay operational expenses, accounts payable and/or to purchase inventory
  • Short-term working capital needs, including seasonal financing, contract performance, construction financing and exporting
  • Revolving funds based on the value of existing inventory and receivables, under special conditions
  • To purchase equipment, machinery, furniture, fixtures, supplies or materials
  • To purchase real estate, including land and buildings
  • To construct a new building or renovate an existing building
  • To establish a new business or assist in the acquisition, operation or expansion of an existing business
  • To refinance existing business debt, under certain conditions

Typical Terms

Amount Term Loans from $25,000 to $5 million.
Terms
  • Working Capital: up to 7 years.
  • Equipment: up to 10 years (or useful life).
  • Real Estate: up to 25 years.
Maximum Interest Rates
  • Fixed or variable.
  • Terms less than 7 years: Wall Street Journal Prime + 2.25%.
  • Terms equal to or greater than 7 years: Wall Street Journal Prime + 2.75%.
Collateral The bank will take a lien on  business assets and/or a mortgage on real estate.
Fees SBA Guarantee Fees:

  • Loans up to $150,000 — no guarantee fees.
  • Loans from $150,001 to $750,000 — 3% of the guaranteed portion of the loan.
  • Loans from $750,001 to $5 million — 3.5% of the guaranteed portion up to $1 million and then 3.75% for guaranty above $1 million.
Underwriting Requirements
  • Personal guaranties by all owners of 20% or more.
  • Adequate business collateral, or personal assets securing personal guaranty, i.e. mortgage on a home.
  • Hazard Insurance.
Financing
  • Loans less than or equal to $150,000 — SBA provides 85% guarantee.
  • Loans greater than $150,000 — Guaranteed amount is 75%.

A Great Program

The 7(a) program is truly a great offering.  It provides access to much needed capital that ordinarily wouldn’t be available to smaller companies.  This, in turn, spurs growth in the economy.  If you need help with a valuation – or access to a lender – give us a ring.  We do a vast number of business valuations for 7(a) loans, and have a broad network of lenders that we’d be happy to put you in touch with.

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SBA Loan Checklist

Getting ready to request an SBA Loan for financing?  Like a lot of things in life, it’s best to go into it being prepared.  That means understanding the SBA Loan Process, and doing all your homework early.

To help you along that path, check out our SBA loan checklist below: Read more

2014 SBA 7(a) Lending Stats

The SBA recently released FY14 lending statistics.  As always it’s interesting to see which banks are most active – and what the “sweet spot” is for loan sizes. Read more

An Overview of SBA Loans

SBA Loan Program Overview

The SBA has two primary loan programs. The most commonly used is the 7(a) program – which we focus on here – and the 504 program.   The 7(a) program is frequently used for working capital expansion or to fund the acquisition of an existing business.  In fact, as a business valuation firm, we are most often involved with the SBA 7(a) program in the context of business acquisitions.

One important distinction is that the SBA is not actually a lender.  The loan is extended by a bank, and the SBA in turn guarantees a portion of the loan.  Thus it’s somewhat of a misnomer when someone suggests “getting a loan from the SBA” – as it is only guaranteed by the SBA.

We very frequently hear directly from borrows that are looking to secure an SBA loan, so we thought it would be apropos to provide a quick overview of the program and its key elements.

Eligibility: What Can a 7(a) Loan be Used For?

SBA Loans are provided to businesses, but it is both the character and nature of both the business and the borrowing principles that dictate eligibility.  Key considerations include what the business actually does, as well as the character and creditworthiness of the borrower.

To be eligible businesses must:

  • Operate for profit
  • Be small, as defined by SBA
  • Be a US based business
  • Have reasonable invested equity (Yes, this sounds like a future article, right reader? )
  • Use alternative financial resources, including personal assets, before seeking financial assistance
  • Be able to demonstrate a need for the loan proceeds
  • Use the funds for a sound business purpose
  • Not be delinquent on any existing debt obligations to the U.S. government

Certain types of businesses are declared ineligible by default by the SBA.  While there is actually quite a lengthy list, suffice it to say that if you think the government wouldn’t really want to be involved in a type of business, it’s probably not eligible for the 7(a) loan program.  Some examples of ineligible businesses include:

  • Banks and Lenders
  • Businesses engaged in illegal activities
  • Lobbyists
  • Businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting

Requirements

7(a) Loan Limits: How Much?

The 7(a) program has a cap of $5 million.  That being said, many lenders do not consider loans approaching the upper threshold of size limits.  In fact, loans tend average between 300k and 400k.

That being said, some lenders prefer larger loans (and likewise some trend smaller).  It makes sense, then, to understand what the appetite a particular bank has for loans by size before starting the application process.

Proceeds:  What Can You Use a 7(a) loan for?

  • To provide long-term working capital to use to pay operational expenses, accounts payable and/or to purchase inventory
  • Short-term working capital needs, including seasonal financing, contract performance, construction financing and exporting
  • Revolving funds based on the value of existing inventory and receivables, under special conditions
  • To purchase equipment, machinery, furniture, fixtures, supplies or materials
  • To purchase real estate, including land and buildings
  • To construct a new building or renovate an existing building
  • To establish a new business or assist in the acquisition, operation or expansion of an existing business
  • To refinance existing business debt, under certain conditions

 

Typical Terms

Amount Term Loans from $25,000 to $5 million.
Terms
  • Working Capital: up to 7 years.
  • Equipment: up to 10 years (or useful life).
  • Real Estate: up to 25 years.
Maximum Interest Rates
  • Fixed or variable.
  • Terms less than 7 years: Wall Street Journal Prime + 2.25%.
  • Terms equal to or greater than 7 years: Wall Street Journal Prime + 2.75%.
Collateral The bank will take a lien on  business assets and/or a mortgage on real estate.
Fees SBA Guarantee Fees:

  • Loans up to $150,000 — no guarantee fees.
  • Loans from $150,001 to $750,000 — 3% of the guaranteed portion of the loan.
  • Loans from $750,001 to $5 million — 3.5% of the guaranteed portion up to $1 million and then 3.75% for guaranty above $1 million.
Underwriting Requirements
  • Personal guaranties by all owners of 20% or more.
  • Adequate business collateral, or personal assets securing personal guaranty, i.e. mortgage on a home.
  • Hazard Insurance.
Financing
  • Loans less than or equal to $150,000 — SBA provides 85% guarantee.
  • Loans greater than $150,000 — Guaranteed amount is 75%.

 

 

A Great Program

The 7(a) program is truly a great offering.  It provides access to much needed capital that ordinarily wouldn’t be available to smaller companies.  This, in turn, spurs growth in the economy.  If you need help with a valuation – or access to a lender – give us a ring.  We do a vast number of business valuations for 7(a) loans, and have a broad network of lenders that we’d be happy to put you in touch with.

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