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Loans for Distressed Businesses Are Going Fast: Act Now

The COVID-19 pandemic has left the economy in shambles, and many businesses are scraping to survive.

As more and more businesses face serious economic hardship, Congress and the Small Business Administration have stepped up to provide a lifeline to cash-strapped companies. The Paycheck Protection Program (PPP)—rolled out in late March as part of a larger economic stimulus law—quickly ran out of funds but has since been replenished, while an SBA emergency disaster fund was quickly drained as well.

There are still loans available, but if your small business is facing difficulties due to the COVID-19 outbreak and the shelter-at-home orders, you need to act fast before the programs that are still available are also depleted. And there is no guarantee that Congress will pass additional stimulus legislation to help out foundering businesses.

Here’s what is available at this time:

Paycheck Protection Program
The first round of funding that was made available through the $350 billion program has already run dry due to high demand. On April 27, the SBA announced that it would once again start accepting applications for the PPP after Congress passed legislation that replenished the depleted pool with an additional $310 billion.

Between April 27 and May 3, the program made about 2.2 million loans worth more than $175 billion to small businesses, according to the SBA.

The PPP is a loan program designed to incentivize small businesses to keep their workers on the payroll. Businesses can borrow 2.5 times their monthly payroll costs, up to $10 million.

The SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. Loan recipients must use at least 75% of the amount they borrow for payroll expenses to qualify for forgiveness.

Any portion that isn’t forgiven must be repaid in two years, following a grace period of six months. The balance will carry an interest rate of 1%.

You can apply through any existing SBA lender, or through any federally insured depository institution or federally insured credit union. The SBA has compiled a list of eligible Paycheck Protection Program lenders.

Eligibility: Generally, a business is eligible for a PPP loan if it has 500 or fewer employees (including full-time, part-time, and temporary employees) whose principal place of residence is in the United States.

One final note: If you applied during the first round and didn’t receive a loan, you likely don’t need to reapply. But you should get in touch with the bank through which you applied to see whether all of your documentation is in order, and if they may need additional information.

SBA Debt Relief
The SBA is providing a financial reprieve during the COVID-19 pandemic to small businesses that have already taken out other SBA loans.

It is paying six months of principal, interest, and associated fees that borrowers owe for all current SBA loans they have. Companies that receive PPP loans or Economic Injury Disaster Loans (see below) are not eligible for this additional debt relief.

The relief is automatically extended to all current borrowers, who do not need to apply to receive assistance.

Economic Injury Disaster Loans
The SBA had also opened its Economic Injury Disaster Loan program to small businesses that were affected by the coronavirus epidemic. In addition to loans, it was also offering qualifying small businesses a loan advance of up to $10,000 that did not have to be repaid.

However, due to the unprecedented demand for these loans and advances, the program was closed to all businesses—except those in the agricultural industry—as of April 15.

The SBA said it would continue processing applications that were submitted before the portal stopped accepting new applications. It is handling those applications on a first-come, first-served basis.

California Disaster Assistance Loan Guarantee
Businesses that do not qualify for federal relief can apply for the California Small Business Disaster Relief Loan Guarantee Program, which guarantees small business loans for firms with up to 750 employees.

The program is run by the state Small Business Finance Center, which partners with financial institutions after the governor declares a state of emergency. Loan proceeds can be used for business continuance or lost income as a result of the COVID-19 pandemic.

The program offers to guarantee loans for borrowers, in order to encourage banks to provide access to capital for these distressed businesses.

The guarantee is available for up to seven years and will repay up to 95% of the loan should the borrower default. The California Small Business Finance Center has put together a list of participating lenders.

The Takeaway
We cannot emphasize enough that you have to act fast if your company is facing difficulties due to the COVID-19 pandemic. The first round of PPP funding ran out incredibly quickly and more than half of the second round has already been snapped up.

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