What the Economic Stimulus Really Means for Small Businesses
Now that the Senate has passed the CARES Act, we’re all trying to figure out how this legislation will work (the House is expected to pass the legislation on Friday). The landscape is changing fast, and each new development sets off a chain reaction, a bit like a game of dominos.
Here’s what we know right now: First, the SBA 7(a) loan program will be injected with $350 billion in funding for small businesses. And second, these loans can be forgiven if businesses maintain staffing (via the Paycheck Protection Program), and proceeds can be used for:
- Paid sick leave
- Payroll shortfalls due to revenue slowdowns
- Increased costs due to supply chain issues
- Rent/mortgage obligations and utility payments
- Debt payment for obligations that can’t be met due to revenue losses
This is great news for all of us who care about small businesses and the people who work for them.[1] If you’re a small business owner, you’re probably asking two questions:
- Do I qualify?
- Where do I sign up?
Do You Qualify?
The answer is most likely yes. There are a bunch of stipulations so we encourage you to seek advice from your lawyer, but as long as your company was operating on January 1, 2020, and you’re not delinquent on debts to the U.S. government, you should qualify. The act relaxed the requirements of the 7(a), including the provision of collateral, but I encourage you to get up to speed on the eligibility requirements for the SBA 7(a) loan program.
How Do I Apply?
Before I answer that question, here’s a quick background on how the 7(a) program works. The 7(a) loans are NOT offered by the SBA directly; instead they are offered through intermediary lenders (aka banks) and the SBA acts as an insurer for this debt. These banks are commonly referred to as Preferred Lenders. So, first things first, do not call the SBA directly.
Another thing to understand: the 7(a) program allocates about $25 billion in 7(a) loans annually; the CARES Act is adding $350 billion to that. In addition, the standard time for a bank takes to process a 7(a) loan is 60 days, and companies need money more quickly than that. The big question we don’t have an answer to is how this system will work.
From The Wall Street Journal:[2]
The program envisions a much larger role for the 7(a) program, leading some small-business experts to question whether the SBA and lenders are up for the task ahead.
“This is a completely untested system here: Using the banks that are part of the 7(a) program to essentially run an emergency loan forgiveness program, which is not what they do under 7(a) right now,” said John Arensmeyer, CEO of Small Business Majority, an advocacy group.
These lenders will have to quickly adjust to new standards for issuing the loans and the legislation’s provision that allows for loan forgiveness, Mr. Arensmeyer said. Those factors could affect how quickly and smoothly the loan program works, he said.
Tl;dr:
We know more than we knew yesterday, but still don’t know when the next domino will drop. I expect that we’ll learn a lot more in the next 24-48 hours, and as we continue to do so, we’ll keep you updated.
Masterplans is a veteran-owned business that specializes in providing the highest-level business development consulting. For 17 years we have helped thousands of entrepreneurs launch new businesses and put their ideas in motion. Now, more than ever, we want to see these same businesses survive the largest economic disaster of our generation. We are offering our expertise in navigating the SBA world and will do it at cost.
[1] Nationwide there are 30.7 million small businesses employing 59.9 million people. That is 47.3% of the private workforce. Source
