Small businesses prepare for second chance at SBA loans

Companies that lost out on the first round of funding from Small Business Administration loans for relief from the coronavirus pandemic have been given a second chance, now that the federal government has approved an additional $310 billion in funding. 

The funding covers the Paycheck Protection Program and the Economic Injury Disaster Loan after the first $349 billion ran dry earlier this month.

"These are people who didn't make it the first time," Angela Venti, director of practice growth at Alloy Silverstein, a Cherry Hill, New Jersey-based accounting firm, told this website Monday morning.

Venti said many companies that never got approved for the first round of funds are now in line for funding, as well as companies that haven't yet applied.

Some of the funding for the second round — $60 billion — has been specifically allocated to smaller banks to process loans, Venti said. "They were saying they had a hard time on the last round," she said. "That has to be separated from the Chases, the Bank of Americas, the big banks."

Two key loan programs

Borrowers can apply for either the Paycheck Protection Program, which is for companies with fewer than 500 employees, or the Economic Injury Disaster Loan, which is for mid-size and large companies.

Under the PPP, the applicant asks for a certain amount up to $10 million based on 2019 or payroll costs or 2018 costs if 2019 data is not available. The PPP loans can be used for payroll, mortgage interest, rent or utilities, and carry a 1% interest rate for two years and are potentially 100% forgivable.

Under the EIDL loan, the SBA determines the amount of the loan up to $2 million.

"You just submit your losses; they determine the loan amount," Venti said.

EIDL loans above $10,000 carry a 3.75% interest rate for profit organizations and 2.75% for non-profit organizations over a 30-year term.

The first $10,000 of the EIDL loan is in the form of a grant that does not have to be repaid.

"It's much more flexible (than PPP) on what you can use it for," Venti said. 

The EIDL is not as well-suited for businesses that don't have a lot of employees, such as independent contractors and entrepreneurs, Venti said.

"That whole group of people can't do the PPP loan, or it's a really small amount not reflective of what they really make, and they're very good candidates for the EIDL," she said.

"The only trouble you could run into is if you got the PPP and the EIDL and you double-dipped," she said.

Second round expected to run out soon

"Every single person that I've talked to is absolutely anticipating that it's going to run out again," Venti said. She said her company was encouraging clients last week to be ready to apply.

Richard Hunt, CEO of the Consumer Bankers Association, told CNBC he expects the second round of funding to run out in about four days, providing the system doesn't break down due to the demand. Hunt estimates it will take $1 trillion to meet the demand from small businesses. 

"This is an unprecedented situation — the demand for this product is off the charts," Hunt said. 

Hunt said he expects 1.3 million applications to be filed in the second round, on top of 1.6 million approved for funding before the first round ran out.

Borrowers face other obstacles

Businesses looking for help face other obstacles as well.

Lauren Lynch, who owns three bars and a restaurant in New York City and applied for loans after the first funding round ran out, told CNBC that the issue is that the federal government also increased unemployment insurance by $600 per week, which makes it hard to convince staff to return.

Lynch received an email from her bank, Chase Bank, advising her there were 100,000 applications ahead of hers.

In addition, some people don't feel safe returning given the health risks from coronavirus, and other staff members just aren't available because they've fled the city, she said.  

About 20% of submitted applications for the PPP and EIDL loans have been fully processed with funds deposited in the borrower's account, but 80% of respondents said they are still waiting, and many do not know where they are in the application process, according to the National Federation of Small Businesses.

Most small business owners believe it will take beyond 2020 to recover from the economic impact of COVID-19, with only one-third of small business owners believing their community will get back to a normal level of economic activity by the end of the year, according to the NFSB. A quarter of owners believe it will not be until 2022 or later before the economy returns to normal.