As a result of COVID-19, businesses of every size are struggling to determine cash flow in the short and long term. Facing the biggest liquidity challenge of our lifetime to date, and with economies essentially shutting down over much of the globe, small businesses in particular are faced with making tough daily decisions.
The Small Business Administration (SBA) is offering help in the form of its Economic Injury Disaster Loan and SBA 7(a) Relief Programs — aimed at small businesses who often don’t have the capital “cushions” to extend for two to four months without a stream of revenue.
Cohen & Company hosted a webinar on Friday to answer critical questions on the minds of many of our clients. I had the privilege of moderating the panel, which included Rep. Anthony Gonzalez, U.S. Congress, 16th District; Jeff Banks, Vice President, SBA Product Specialist, Huntington; Ray Graves, Lead Lender Relations Specialist, U.S. Small Business Administration; and Adam Whitaker, Vice President, First National Bank Small Business Finance.
The resulting summary of the Q&A below, which also takes into account a few small changes from the final language of the CARES Act, focuses on the SBA’s forgivable loan programs and what potential applicants need to know.
1. The number one question on the minds of small business owners is when can they start applying for the 7(a) relief, and when will they see funds?
As soon as humanly possible is the goal, from all sides of the equation. Technically, administrators have 30 days to provide guidance to banks on delivering funds, and banks will need time to digest the final guidance expected out the week of March 30. However, the goal seems to be between seven to 14 days before applications can begin.
Additionally, the goal is also for applicants to be drawing loans directly from banks and lenders they’re familiar with, rather than going through the SBA’s website for funding. Many northeast Ohio lenders believe they can turn loans around one to three days once the program is in place, or perhaps even same day. Many are already putting the infrastructure in place now to make this happen.
>> Read “Expansion of SBA 7(a) Loan Program Offers Paycheck Protection for Businesses”
2. How do you envision the process working in your bank? Will you be using commercial bankers to assist with the SBA loans?
For such an immense program, we suspect this will be an all hands on deck situation, instituting and using whoever we can. The SBA department within each bank will lead the program, but to get dollars out to owners, all parts of the bank will likely be involved in delivering funds.
3. Our presentation discusses the importance of the affiliation rules, but how are they implemented in practice?
The affiliation rules will be implemented as they generally are at the SBA; they are important even in the existing program. The SBA needs to ensure everyone applying for loans fits into the size requirements, and having affiliations can definitely impact whether or not you fit into the category of a small business. There is, however, a chance the SBA will relax the affiliation rules, which would allow more businesses to be eligible for SBA 7(a) loans.
4. What about the senior lender? Will they need to approve a waiver for certain covenants in existing loan documents?
You should be discussing these issues with your senior lender. The SBA underwriting may not require it, but your senior lender will.
5. Construction companies usually hire specialty labor who could only be employed for a few days. Would these types of laborers count toward the 500 employee limit to be a small business?
The count usually works off of full-time equivalent (FTE) employees, but the CARES act appears to count full time and part time employees. The SBA may come out with different rules considering the situation, but businesses should prepare, as each employee counts.
6. Will the 7(a) loan be included in covenant calculations?
This is just speculation, but the 7(a) may be waived in covenant calculations for at least the first year of the loan. If it isn’t forgiven, it most likely will be included on a go forward basis.
7. Do not-for-profits qualify for Economic Injury Disaster Loan or 7(a)?
Private not-for-profits do. It’s important to understand that these new rules differ from historical 7(a) loan rules. The new 7(a) loan opens up the rules a bit, including nonprofits and other organizations not generally allowed for 7(a), as long as they stay under the 500 employee cap.
However, even with the new rules, quasi-government or religious organizations likely would not be eligible. The organization can be affiliated with a religious organization or have religious ties, such as the YMCA, but it can’t be involved directly in any sort of religious activities.
>> Read “Not-for-Profit Update: Eligibility for SBA Loans Addressed; Single Audit Extensions Granted”
8. Loan forgiveness is a big concern. What if a small business already laid employees off or reduced pay?
The intention seems to be that owners have to react to the current economic environment. Therefore, businesses are not going to be penalized for having laid off employees but will be expected to rehire individuals once economic conditions allow. That is part of the mechanics likely involved in the loan forgiveness aspect. The rehire provision allows companies who have made tough decisions to eliminate reductions by June 30, 2020, and still qualify for loan forgiveness.
9. What if a small business has an existing SBA loan and needs relief?
The SBA is encouraging lenders to take active steps to defer loans not sold in the secondary market for six months, and 90 days for those sold in the secondary market. Lenders are actively reaching out to customers and offering these deferrals, and many are taking them. If a business needs additional working capital, banks are looking at that internally but are encouraging them to use the relief programs.
>> Read “Is Your Business a Small Business for the SBA Economic Injury Disaster Loan Program?”
10. Employer payroll taxes can be delayed from the enactment date through December 31, 2020. Half are due on December 31, 2021, and the remaining half on December 31, 2022. Does getting a 7(a) loan affect that?
Yes, payroll taxes may be deferred only until disbursement of a 7(a) loan. Once the loan has been received, payroll taxes are no longer eligible for the deferral and must be paid.
11. What are banks doing for companies over the 500 person threshold?
Right now, while measures focus on small businesses of 500 or less, larger companies are encouraged to continue working through conventional lending means and will be evaluated on a case-by-case basis.
Cohen & Company continues to work directly with members of Congress on providing insight and recommendations regarding key areas of relief for our clients. There is more likely to come from the government to help get real liquidity back into the economy in the near-term, including correcting flaws in current offerings, while also looking at the municipal bond market and aiding local and state governments that will be losing tax revenues. We’re here to help guide you to resources and navigate these programs for your business.
Contact Adam Hill at firstname.lastname@example.org or Dave Sobochan at email@example.com to discuss this topic further.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.