How to Get Disaster Funding with Live Oak Bank

How to Get Disaster Funding with Live Oak Bank

How to Get SBA Disaster Funding

1:24 – Ed’s Introduction
4:03 – Who is John Randall?
6:25 – Economic Injury Disaster Loan
8:42 – Process: from application to funding
11:47 – The $2 trillion Stimulus bill

 

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Show Notes

Ed’s Introduction

Ed Mysogland is the managing partner of Indiana Business Advisors and the host of The Defenders of Business Value podcast. Indiana Business Advisors is an organization that helps buyers and sellers buy and sell companies. Today’s topic is about survival. So if you’re hoping to talk about business acquisition financing, that’s not the topic for today.

If you know of a business owner that’s hurting or needs to hear what John’s going to talk about, please share this podcast with them. You can subscribe to the Defenders of Business Value podcast. It’s anywhere where podcasts are presented, such as Apple iTunes, iHeart, Spotify, etc.

Who is John Randall?

John is one of the premier bankers in the country. He and Ed have known each other for 20 years. John is just as good of a guy. He is transparent. And when he says he can do something, somehow, someway, he gets it done. 

John is the vice president of Live Oak SBA lending. Live Oak is the number one SBA lender in the land. They are committed to helping small business owners. Their teams continue and are committed to getting capital into the hands of small business owners, absolutely, any way they can.

John hopes to spend the next few minutes discussing a direct program that the United States Small Business Administration has available and how you can access capital through their low-interest rate economic disaster loan. Many of you probably remember, our president spoke a few weeks ago about $50 billion for small business, and Congress has completed that appropriation due to the COVID-19 virus, and the SBA is accepting applications now. John’s objective is really to make sure you are aware of how the low-interest rate working capital loan program works, discuss the eligibility rules behind it, and the process to get it. He wants to make sure everybody understands by the end of the call the timeline for potentially receiving these funds. 

Economic Injury Disaster Loan

The Economic Injury Disaster Loan Program is designed to get working capital funds into your pocket as quickly as possible. The funds can be used to pay any and all operating expenses. There’s really no limitation as long as you’re paying business expenses. The term is up to 30 years, which is unheard of for a business loan, especially for working capital. The ultimate approval will be determined by the SBA under a rider, based on the cash flow needs of your business. You can request up to 30 years. It’s not necessarily guaranteed, but the SBA absolutely intends on giving everyone as much flexibility in the repayment timeline as possible. The rate that’s been published today is 3.75%, which is a fixed rate with no prepayment penalties. It’s a great low rate. The program has a maximum amount of $2 million per loan and once approved, the first payment is typically not due for the first 12 months.

Regarding edibility, if you’re an SBA borrower today, chances are you’re definitely a small business and you’ll be eligible for the program. The actual requirements that the SBA is checking are tied to how long you’ve been in business, and you have to have been in business for at least a year, and you must be in a county that’s been declared a disaster area by the governor of your state. Go to SBA’s website to check disaster declarations. All counties in the country have now been certified, but if you get on and you check, don’t be disappointed if your county does not yet show. It should shortly. And the one remaining significant eligibility hurdle is you have a FICO score of at least 570.

Process: from application to funding

The URL http://www.SBA.gov/disaster is being referred to as the online disaster application portal. You can complete the application and all necessary forms right on the website. The forms, you may be familiar with already. There’s an authorization for tax transcripts, a personal financial statement, schedule of liabilities for your business. At this point, they’re not asking you to upload a current profit and loss or balance sheet. The SBA may request it later, during the underwriting process. 

John found that having your most recent personal and business tax return, as well as a debt schedule, or at least knowing the balance on your current business debt to monthly payments will help you as you complete the application. It will ask some questions about revenue in the last 12 months and the cost of goods sold. It will also ask about the formation date for your company. And all those things are easily found on the front page of your business tax return. You use the portal to complete the application and the attachments. You’ll submit it, and you’ll get an application number emailed to you shortly thereafter. 

John encourages everyone to apply so you can get in line for the approval for this loan program. Just because you apply doesn’t mean you have to take the money, but it will at least get you in line for the underwriting process so that once you have the approval, you can make the choice of whether or not you want that money to get us through this challenging time, and make the decision at that point what funding you want to use.

He also encourages you to be patient with the application process. There’s a tremendous amount of traffic on the government’s website right now. If you don’t get through immediately, eventually, you will. People are encouraged to log in between 7:00 PM and 7:00 AM. There’s also been some chatter online about some browsers working better than others.

Based on John’s personal experience, he completed one of these applications with a family member for their business recently. It took him about 30 minutes to finish and having those tax returns and debt info would’ve sped it up even faster.

John wants to reiterate that Live Oak and the SBA stand with you. The organizations are committed to your success in this humbling and unprecedented time. It’s difficult to speak with certainty to all the additional programs that will be available because they’re evolving literally by the minute. There are additional resources available on Live Oak Bank’s website as well on the SBA site

The $2 trillion Stimulus bill

Speaking of things that are evolving and becoming close to being finalized, John has some information on the $2 trillion Stimulus bill that the Senate has passed.

In addition to direct payments to qualifying taxpayers of an estimated 250 billion, the program should also include a similar amount for unemployment insurance funding. About 150 billion for state and local municipalities, about 240 billion for hospitals and health care services, 30 billion to airports and transportation infrastructure. It will include payroll tax cuts for employers for the year 2020, and about 350 billion has been authorized for new SBA loans. 

For perspective, the 7(a) loan program has been running $24 to $25 billion each of the last three years. So this 350 billion of new loans are primarily allocated towards a paycheck protection program loan. Now, once again, this has not been fully passed by Congress. The president has not yet signed it, and the SBA has not fully rolled it out, but we’re within a day of Congress finalizing this, and at that point, it will be rolled out to multiple SBA lenders across the country to provide funds directly rather than applying on the SBA’s website. 

What John knows about the program so far, the paycheck protection program will have a couple of different steps. First will be a greatly condensed SBA application to an SBA lender, primarily looking at what your average monthly payroll has been over the last 12 months. And he believes this loan is going to be up to two and a half times your average monthly payroll expense. You can use the loan for debt obligations that were incurred prior to 3/1/20. You can use it for payroll, employee salaries, mortgage payments or rent. I think it will be a 10-year loan with no payments in the first year at a fixed rate of 4%. 

The exciting thing that is in the legislation that the Senate has passed is that if you can keep your payroll stable through June of this year, the loan will be eligible for principal forgiveness. In other words, it could look more like a grant than a term loan.

We’ll have more details as soon as Congress finished the passage, but John’s advice is to apply for the SBA disaster loan, apply for the new paycheck protection program loan once it’s available, and talk to your current bank about a credit line. Look for any and all funding sources. And once you have approvals, then you can make the choice of which program makes the most sense. John doesn’t believe that the SBA is going to let you use both the paycheck protection program and the disaster loan for the same purpose of funding payroll. It’s going to be one or the other. But once again, he encourages everybody to apply for both. Once you have approvals, then make the choice of which one to take.

Questions and Answers as of 2020-03-26

A lot of business owners did not have their 2019 tax return complete, even though they were due March 15th. What do you do then?

Referencing the prior year’s tax return will be the simplest way.

What browsers work best on the site

A couple of people that Ed already referred to the site have indicated how clunky it was, and they don’t realize that there are how many millions of people that are on simultaneously. But at any rate, the feedback was that the Chrome browser and Firefox work the best.

What will be the impact on recent congressional assistance package on small business with less than 50 employees?

John thinks that most of the programs referenced, specifically the paycheck protection program loan, is available for anybody with 500 employees or less. There’s no breakpoint between 49 or 50 or 51. The focus on that program, he believes, will be your average monthly payroll.

What are the criteria that drive the loan amount?

For the SBA disaster loan, it’s a focus on business operating expenses. They’re asking questions around total revenue and cost of goods sold. For the paycheck protection program, once it’s fully approved and available, they’re focusing on average payroll over the last 12 months, including wages, tips, group health, retirement benefits, and taxes. And John believes it’s going to be two and a half times that average monthly payroll amount will be the maximum loan you’ll be eligible for.

Is the 50 billion you mentioned in addition to the 367 billion in the Senate plan?

Yes. The 50 billion was already approved and allocated as part of one of Congress’ earlier Stimulus bill. The current bill provides 350 billion for new SBA loans and 17 billion for SBA loan subsidies. So it is in addition to.

This is an eligibility question. If you already have a credit line, are you not eligible?

Neither of these loan programs will be impacted by existing credit lines or UCC filings or other collateral that’s already in place. In other words, for the disaster loan, the SBA is looking to take the next best collateral position, so if you had a UCC filing from your bank on your business assets tied to a credit line, the SBA would simply go into a second UCC position behind it. A certain dollar amount, the SBA may or may not take collateral on that loan. Some of those details are still being determined based on the volume of applications they’re getting. 

On the paycheck protection program, while it’s not finalized, John believes there will be no collateral requirements tied to it at all. In other words, get your credit line and one of these loans. It doesn’t have to be an either-or.



Does the SBA have the capacity to do all this?

John’s understanding is that the SBA is hiring and ramping up as quickly as possible to handle the volume of the disaster loan. The paycheck protection program loan, and the 7(a) loans will be underwritten and approved by banks, current SBA lenders that should have the capacity, yes.

Tax returns. Are these required for the company, or individuals, or both?

You will sign an IRS4506 tax transcript form that allows the underwriter to verify your tax returns and the information that you’ve provided. John’s suggestion is to have your business and personal tax returns handy as you complete the application because there’s info on them that will make it go much quicker for you. So ultimately, underwriting will be tied to those tax returns for the disaster loan. On the paycheck protection loan, much of the underwriting is going to be tied to verifying historic payroll expenses. So, less focused on the tax return.

This question is for the SBA. Can you go into more detail on how the paycheck protection could potentially be forgiven? What do you think they mean by keeping the payroll stable, and do you think most of these loans will be eligible for forgiveness?

It’s going to be a multi-step process. 

 

First, you’ll get approved for the loan. You’ll get the loan in place, you’ll get the funds. The way it’s currently drafted, the forgiveness piece will be a second application, and you’ll have to prove first and foremost that you used the funds for appropriate purposes. Second, there will be an analysis of your total payroll through June 30th of 2020. There’s a fairly complex formula, but ultimately, it’s looking to see if you kept a similar number of employees and total payroll expenses through the month of June as you did through the last year. And the way it’s been suggested is if you reduce your payroll by 20%, then 20% of your principal balance would not be eligible for forgiveness. So it’s not necessarily an all or nothing thing. You could perhaps have 80% of your principal forgiven, and then at the end of month 12, start payments on a reduced loan amount, based on the 20% that was not adjusted.

John, you facilitated and closed my business loan through Live Oak. You stated that one of the requirements is the business has to be at least one year old. The company I purchased was 14 years old, however, I became the owner in October. Would I be eligible?

John has not seen all the details because, once again, the bill’s not finalized. But he thinks they’re looking at the age of the business. So, if the business is more than 12 months old, John believes you will be eligible.

Any recommendations, if you are in the process of buying a business? For example, if you have a stock sale, does this help satisfy continued requirements, or is there no way for an acquisition that can actually qualify for these types of loans?

These loans are to support existing businesses with existing ownership. The funds are not to be used for the purpose of acquisition. That being said, it makes sense if you have just closed on your acquisition to go ahead and apply for these, and then use the funds for the appropriate purpose of funding payroll or making debt payments.

Are there certain businesses that are going to be given priority? For example, companies that are involved in K through 12 food providers?

John has not heard of the allocation of resources for different industries. That being said, one of the reasons he’s recommending getting in your disaster application now, and then once the paycheck protection program is available, also apply for that is so that you will be able to potentially take the first available.

You mentioned a grant-like repayment for the PCPL. What if your employees are currently unemployed? Would you not qualify, even if you took the loan and then put your employees back on the payroll?

This is a difficult question for John to answer as they’re still waiting to see all the details from this program, but he believes that if the intent is to have people back on the payroll, you should not be penalized if there was a brief period where they were not. The calculation is based on a percentage of total payroll, so even if somebody was laid off for a period of time, and let’s say when that calculation was done, you had 90% of your previous payroll still in place in June, at least 90% of your loan would hypothetically be eligible for forgiveness.



Can you go back over the conditions you need to meet to receive the paycheck protection loan?

The funds need to be used for debt obligations that were in place prior to March first, payroll, employee salaries, mortgage payments, or rent. John believes that the maximum loan amount will be two and a half times the business; average monthly payroll, and you must have 500 employees or less.

I reduced my staff on March 24th, and probably can’t rehire for several weeks. Do I have to retire everyone right away?

John thinks it makes sense to see what the final language looks like for this program before making those types of decisions, but remember, it’s not an all or nothing forgiveness calculation. It will reward you for keeping the people that you can.

I’m a sole proprietor. I have a consulting practice, and I foresee that my pipeline will be dry for the next three to six months. Would someone like me be in a position to be eligible for that type of loan?

John is really not sure. He has not seen the final language on the paycheck protection program. He encourages you to, once again, get your application for the disaster loan, and then once the paycheck protection program becomes available, apply at that point in time, which will have additional details in place. The prudent thing to do is get in both applications.

I’ve already laid off my staff, and they have filed for unemployment. Can I get a paycheck protection loan and rehire my staff back? I know we kind of touched on that.

Yes

Do we have to personally guarantee these loans?

Once again, this is not a final bill, but John’s understanding is that the paycheck protection program will potentially not have collateral requirements or personal guarantees.

I have been sent a form called the disaster relief payment assistant request for borrowers with current SBA loans. This is a principal deferral of your current loans is what I’m told. Are you familiar with this assistance?

It sounds like you’re talking about something specific from your bank, tied to your current loan, not tied to an SBA program available for everyone. Yes, I am. Essentially, it’s a request to not make your principal or interest payment for a period of time, and most SBA lenders are accepting those applications and working to make sure our borrowers are supported.

Can self-employed individuals who do not take a salary qualify?

John doesn't know how that’s going to work with the paycheck protection program yet. He advises you to get an application for the disaster loan program right away, even if that’s your circumstance, and look to see what the approval looks like.

I have two locations with two different TINs and separate payrolls. Do I have to file two applications for the payroll protection loan, and then two applications for the forgiveness?

I’ve not seen the details on how that program’s going to work yet. I will share that on the disaster loan application, the individual that’s completing the application will plug in their personal information, tax ID number, and then information for each of the entities that they own, all on one application. 

The application for the paycheck protection program loan will likely be more specific to your individual lending institution and I don’t know what the format will be yet.

For these programs, can you comment on personal guarantees and collateral? I think you did a little bit of that.

In John’s current understanding, and this is very subject to change on the paycheck protection program, there will likely not be a collateral or personal guarantee requirement. The disaster loan application, he believed, will likely have a requirement for the best available collateral. So it’s okay if you have other liens, UCC filings, or mortgage liens ahead of that new lien. But I believe they are trying to take what collateral they can get. 

If a business hires contractors and keeps them hired, does this satisfy the maintenance payroll requirement? Or is it for full-time employees only?

John doesn’t have those details yet. He believes that this applies to full time and part-time employees, but we need to see the final bill to know for sure.

If you’re headquartered here in Indiana, and you manufacture in another state, but not in Indiana, does that present any issues regarding applying for these loans?

These are federal loans. It should not have an impact, to the best of John’s understanding.

Is there a salary threshold level above $100,000?

Waiting to see the final text of the bill, but John thinks that for the paycheck protection program, there’s likely to be a compensation limit. He has seen 100,000 as the target number for where that’ll end up.

I’m a dentist with two locations that are two S-Corps with two different TINs, a staff of six to eight per location, including myself drawing W-2s. I closed March 12th, and most likely will not open until at least mid-April. Do I qualify for any of these loans?

Apply. Apply for the disaster loan, and once the $2 trillion stimulus bill passes and banks have the paycheck protection program up and running, apply for that as well.

Would these disaster liens only be on the business?

John can’t speak to exactly what collateral the SBA’s going to be looking at on the disaster loan. The SBA 7(a) program looks for any available collateral. It could be business assets, or personal assets, like a junior-lien against real estate. That being said, John doesn’t know the exact collateral requirement on the disaster loan.

What does this do to my long-term business value?

Like what was mentioned at the beginning, right now, we’re posturing how to look for survival, not necessarily how to maintain value. Business value is based on three things: earnings, risk, and expectation. Stabilize the business. When you do go into buying a company or selling a company down the road, there will be an income statement adjustment that is COVID-related. And it’s a nonrecurring event. At least, we hope so. That being the case, that’s an adjustment that we’re certain that the underwriters would look to and understand that everybody was in the same boat. Risk, we’ll have to adjust risk. It depends on the respective company. And then expectation forecasting in small businesses is hard, to begin with. What does a forecast look like for the next one to three years? That may be difficult, and we don’t know if values will necessarily go down, but we think structure for future sales will probably have to be augmented and adjusted to accommodate or mitigate the risk that the buyer’s going to take.

Are there any changes to the SBA 7(a) acquisition loans? Will lenders continue to provide SBA 7(a) acquisition loans if there’s a willing buyer, willing seller who will want to move forward?

The short answer to that is yes. There’s still going to be acquisitions that take place. There’s certainly going to be an emphasis on understanding what impact the business being purchased will have from a cash flow perspective and how that should impact the deal structure. And lenders are going to want to make sure there’s sufficient working capital to survive any future shutdowns or shelter in place orders. But there will be dollars available for continued acquisition financing. 

Connect with John Randall

Email: john.randall@liveoak.bank

LinkedIn: https://www.linkedin.com/in/johnrandall1/

Website: https://www.liveoakbank.com/