Locke Lord QuickStudy: Saving Our Small Businesses: SBA Disaster Assistance Loans for Small Businesses Impacted by COVID-19

As COVID-19 impacts economies worldwide, the U.S. Federal Government has begun taking unprecedented action to aid the U.S. economy.  U.S. small businesses have been one of the key targets of these new actions, as the U.S. government recognizes the vital importance of small businesses to the country and understands that they may have lesser financial capacity to weather the impacts of COVID-19 and thus may be more vulnerable to financial distress.

One of the first actions taken to alleviate this financial burden on U.S. small businesses is the passage of the Coronavirus Preparedness and Response Supplemental Appropriations Act passed on March 6, 2020, which dedicated an additional $20 million to the Small Business Administration (“SBA”) for Economic Injury Disaster Loans (the “Loans”) above what had already be allocated to such Loans in the federal budget.¹

The SBA has always had the ability to issue low-interest long-term loans to small businesses facing substantial economic injury (typically as a result of natural disasters) through the Economic Injury Disaster Loan program.Now, the SBA has declared eligible for this program small businesses suffering substantial economic injury as a result of the Coronavirus (COVID-19) located in certain eligible affected areas.

The SBA will provide  up to $2 million in Loans for selected: (1) small businesses, (2) small agricultural cooperatives and (3) private nonprofit organizations who have suffered “substantial economic injury” as a result of COVID-19 and are located in a declared disaster area.  These Loans are only available to U.S. businesses that meet the SBA’s small business size limits on average annual receipts or number of employees, which vary based on industry.  “Substantial economic injury” means “the business is unable to meet its obligations and to pay its ordinary and necessary operating expenses.”²

Loans can be used for working capital expenses, including fixed debts, payroll and accounts payable, when working capital is unavailable to the small business from other sources.³  The interest rate for the Loans depends on whether the business is a for-profit or non-profit organization. The maximum interest rate for for-profit small businesses has been reduced to 3.75% from the prior maximum of 4.00%, and the maximum interest rate for non-profit organizations is 2.75%.⁴  Term lengths vary, but the maximum term for Loans under the program is 30 years.⁵

For purposes of determining declared disaster areas for purposes of these loans, SBA Administrator Jovita Carranza relaxed the criteria for states and territories seeking an economic injury declaration related to COVID-19⁶  in two ways:

1. States or territories must now only certify that at least five (5) small businesses within such state or territory have suffered “substantial economic injury, regardless of where those businesses are located.”⁷
2. These Loans are now available statewide following an economic injury declaration.⁸

Though the list is frequently updating as the impact of COVID-19 expands, 30 states and the District of Columbia are currently declared as disaster areas and are thus eligible for SBA disaster loans related to COVID-19: Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Illinois, Indiana, Louisiana, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, Washington, and West Virginia.9  Certain counties in other states that are contiguous to these states are also eligible.  We will continue to monitor the list of states as it expands.

Congress is currently working on additional program changes that would assist U.S. small businesses facing economic distress from COVID-19.The Senate Republican proposal published on March 19, 2020 included a new SBA 7A Loan program that would make available to small businesses with fewer than 500 employees loans of up to $10 million from banks that are approved SBA lenders, where part of the loan is forgivable based on the use for working capital such as payroll.The proposal provides that a small business affected by COVID-19 would be eligible only for a new SBA 7A Loan or an Economic Injury Disaster Loan, but not both.  Small businesses may desire to wait until the new SBA 7A Loan program has been finalized before deciding whether to apply for a new SBA 7A Loan or an Economic Injury Disaster Loan.

Your regular Locke Lord contact and the authors of this article would also be happy to help you navigate these new SBA programs, especially as the government considers more programs to assist borrowers. In-person applications at a disaster center or by mail are also accepted, although we do not know if the states will have sufficient resources to attend to in-person requests.¹⁰

Questions related to the program can also be directed to the SBA disaster assistance customer service center at 1-800-659 (TTY: 1-800-877-8339) or disastercustomersercice@sba.gov.

Please visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.

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