EP 30: Live Oak Bank: Disaster Relief Programs to Keep You In Business

My name is Ed Mysogland. I'm the managing partner of Indiana business advisors and the host of the defenders business value podcast. And, you know, Indiana Business Advisors is a organization that helps buyers and sellers buy and sell companies. But today, you know, we're talking about survival. So if you're hoping to talk about business acquisition financing,

that's not the topic for today. So so a couple of housekeeping things I want to make you aware of the first thing is that this replay will be available, immediately where it so Chelsea, the our marketing director will process this and get it back out to all attendees. And if you know of a business owner that's hurting, or needs to hear what John's going to talk about, please send that out. Same thing with the podcast. I'm simultaneously recording the defenders business value podcast, it's being it'll be processed and it too will be pushed out today. So if you're, if you're not subscribing to it already do do that. It's defenders business value. It's anywhere where podcasts are, are, are presented. So Apple, iTunes, I heart, Spotify, things like that. Next, John will be John will be answering questions. So if you have any questions, please put those in the chat box. Now. I don't know what Jon's hard stop is. But he's I know we've talked before recording, he's going to answer as many questions as he can. But at the same time, he can only answer what he knows he can't interpret the SBA and their particular guidance only what he knows as of today. And as of right now, to my knowledge, they have not ratified the stimulus bill. My understanding is that the vote is tomorrow morning at nine. So speaking of that, at nine o'clock tomorrow morning, we will have the SBA on so we'll have Eric Armand Armacost, from the SBA as well as David Watkins from the Small Business Development Center, also on talking about the stimulus bill, and what that means for you. And if you can't, same rinse and repeat situation, we're going to push that back out to everybody that's on, as well as our entire mailing list. So don't sweat if you can't be on. Now. Lastly, and most important, I'd like to introduce John Randall John, I've known him for gosh, it's got to be 20 years he he is one of the premier bankers and he's just as good of a guy and he's transparent. And when he says he can do something he somehow someway he gets it done. He's with Live Oak Bank Live Oak is one of the premier banks Forgive me John, it is the number one SBA lender in the land. So John, take a couple moments and introduce yourself and and have at it.

John Randall  4:34  
And thanks so much. I really appreciate the invitation. Very unique times to be discussing these programs. But I am happy to be here and happy to share some good news that there are some programs to give us hope and to get working capital into everybody's hands. As Ed said, my name is John Randall. I'm a vice president with Live Oak SBA lending and Um, if you don't know a lot about why voc We're absolutely committed to helping small business owners. And our teams continue and are committed to getting capital into the hands of small business owners. Absolutely. Anyway, we can.

My 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 dollars for small business. And Congress has completed that appropriation due to the COVID 19 virus and the SBA is accepting applications. Now. My objective is really going to be to make sure you're aware of how the low interest rate working capital loan program works, discuss the eligibility rules behind it and the process to get it. And I want to make sure everybody understands by the end of the call,

The program will spend most of the time talking about it's known as the economic injury disaster loan program. And it's 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 underwriter based on the cash flow needs of your business, you can request up to 30 years, it's not necessarily guaranteed. But my understanding is the SBA absolutely intends on giving everyone as much flexibility and the repayment timeline as possible. The rate that's been published today is 3.75%, which is a fixed rate with no prepayment penalties, to great low rate. The program has a maximum amount of $2 million per loan. And once approved, the first payments typically not do for the first 12 months.

regarding eligibility, 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. There's a link here through the SBAS website to check disaster declaration declarations, I believe 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 to have a FICO score of at least 570. Let's talk a little bit about the process from application to funding. The URL sba.gov/disaster has been referred to as the online disaster application portal. And 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. I've 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 cost of goods sold. It will also ask about formation date for your company and all those things are easily found on the front page of your business tax return. 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. I really encourage 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. I encourage you to be patient. There's a tremendous amount of traffic on the government's website right now. If you don't get through immediately, eventually you Well, I know they're encouraging people to log in between 7pm and 7am. And there's also some been some chatter online about some browsers working better than others. I will tell you from personal experience, I completed one of these applications with a family member for their business recently, that took me about 30 minutes start to finish. And having those tax returns and debt info would have sped it up even faster. I want to reiterate that live oak and the SBA, stand with you organizations are committed to your success and 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 banks website as well on the SBA site. Speaking of things that are evolving and becoming close to being finalized, I do have some information on the $2 trillion stimulus bill that the Senate has passed, and we're hoping the House votes on tomorrow morning. 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. That 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 seven a loan program has been running 24 to $25 billion each of the last three years. So those 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's not yet signed it, the SBA has not fully rolled it out. But we think we're within a day of Congress finalizing last. 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 website. What I do know 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 I believe 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 231 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 finishes is the passage. But my advice is 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. I don'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, I encourage everybody to apply for both. Once you have approvals then make the choice of which one to take.

Any questions so far?

Ed Mysogland  16:07  
Yeah, John, there's lots of them. The first one on the tax return. A lot of business owners did not have their 2019 Complete, even though they were doing what March 15? What do you do then?

John Randall  16:23  
Reference the prior year's tax return will be the simplest way.

Ed Mysogland  16:26  
Okay. The other you had mentioned about browsers on the site. A couple of people that I've already referred to, to the site have indicated how clunky it was. And you know, they don't realize that there's how many millions of people that are on simultaneously. But anyway, the feedback was that the Chrome, Chrome browser and Firefox work the best question. First question, what will be the impact on recent congressional assistance package on small business with less than 50 employees?

John Randall  17:08  
I believe that most of the programs referenced specifically the paycheck Protection Program loan is available for anybody with 500 employees or less. I don't believe there's a difference between the there's not breakpoints between 49 or 50, or 51. Really, the focus on that program, we believe will be your average monthly payroll.

Ed Mysogland  17:37  
Okay. Do you have any insight on the specific on a specific business might get a loan given? I guess the question is asking is what's the criteria that drives the loan amount?

John Randall  17:55  
For the SBA disaster loan, it's a focus on business operating expenses. So 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 I believe 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.

Ed Mysogland  18:40  
And while we're at it, for any of you that have questions again, go back, go over to the chat window and put them in. I think I have a little bit of time with John remaining so I'll keep plowing through these. You. Next question is Is the 50 billion you mentioned in addition to the 367 billion in current Senate in the senate plan?

John Randall  19:05  
Yes, the 50 billion was already approved and allocated as part of one of Congress's earlier stimulus bills. The current bill provides 350 billion for new SBA loans and 17 billion for SBA loan subsidies. So it is in addition to okay,

Ed Mysogland  19:29  
this is an eligibility question. It says that, if you already have credit, and in this case, she has a credit line, are you not eligible?

John Randall  19:43  
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 alone, the SBA is looking to take the net is the 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, I believe 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

Ed Mysogland  20:46  
a couple of people have have put this into the chat. Does the SBA have the capacity to do all this?

John Randall  20:55  
Well, I understand understanding is 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 seven eight loans will be underwritten and approved by banks, current SBA lenders, that should have the capacity. Yes.

Ed Mysogland  21:21  
All right. Next question. Up, you just answered that tax returns are these required for the company or individuals or both.

John Randall  21:35  
You will sign an IRS 4506 tax transcript form that allows the underwriter to verify your tax returns and the information that you've provided. My suggestion is 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. But 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 on the tax return.

Ed Mysogland  22:22  
All right. This next question may be for for the SBA, not you but you can make that determination. So can you go into more details 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?

John Randall  22:47  
So excellent question, it's going to be a multi step process. First, you'll get approved for the loan, we'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 use the funds for appropriate purposes. And second, there will be an analysis of your total payroll through June 30 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 Expense 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.

Ed Mysogland  24:20  
Okay. Next question. Thank you by the way, John, you facilitate and closed my business loan through live oak, you stated that one of the requirements of the biz up pretty much you stated that one of the requirements or the business has to be at least one year old. The company I purchased was was 14 years old. However, I became the owner in October would I qualify or be ineligible or be eligible or excluded?

John Randall  24:50  
We've not seen all the details because once again the bill is not finalized but I believe they're looking at the age of the business. So the business is more than 12 months old, I believe you will be eligible.

Ed Mysogland  25:07  
Okay. housekeeping matter. Hey, Chelsea, would you make sure that the link to the that John had posted goes into the chat box for everybody that's on so they can just click it and start the process of applying. Alright, next question. Any recommendations? If you're in the process of buying a business, for example, you have you have a stock sale? If you have a stock sale, does this help satisfy satisfy continue continually record continuing to that the continued requirements or is there no way to foreign acquired that can actually qualify for these types of loans?

John Randall  25:52  
So these loans are to support existing businesses with existing ownership. The funds are not to be used for the purpose of an acquisition. That being said, I believe that 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.

Ed Mysogland  26:26  
Okay. Are there certain businesses that going to be given priority for example, companies that are involved in in K through 12 food providers?

John Randall  26:39  
I have not heard of allocation of resources for different industries. That being said, one of the reasons I'm recommending getting in your disaster application now. And then once the paycheck Protection Program is available, also applied for that, so that you will be able to potentially take the first available.

Ed Mysogland  27:13  
You mentioned a grant, like repay for the PC PL I guess that's principle? What if your employees are currently on unemployment? Would you not qualify? Even if you even if you took the loan and then put it and then put your employees back on the payroll?

John Randall  27:37  
We're still waiting to see all the details from this program. That's a difficult question for me to answer. But I believe if the intent is to have people back on payroll, you should not be penalized if there was a brief period where they were not. The calculation is based on 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.

Ed Mysogland  28:25  
Okay, next question. When we get out of this mess, what's the seven eight acquisition loans look like?

John Randall  28:35  
We're still waiting to see how this bill comes out in its final passage. i There's things I hoped for, but I am hesitant to speculate. Okay.

Ed Mysogland  28:50  
Can you go back over the conditions you need to meet to receive the paycheck protection loan.

John Randall  29:00  
The funds need to be used for the obligations that were in place prior to March first. Payroll, employee salaries, mortgage payments or rent. I believe that the maximum loan about will be two and a half times the business's average monthly payroll and you must have 500 employees or less.

Ed Mysogland  29:38  
All right, so next I reduced my staff on March 24 24th and probably can't rehire for several weeks. Do I Do I have to retire everyone right right away.

John Randall  29:53  
I think it makes sense to see what the final language looks like for this program before making those types of decisions. wins. But remember, it's not an all or nothing forgiveness calculation. It will reward you for keeping the people on that you can.

Ed Mysogland  30:11  
Thank you. I'm a management consultant file as an S corp, and I pay myself wages, I have excellent credit, would I be eligible?

John Randall  30:21  
I wish I could tell you I'm really not sure at this point.

Ed Mysogland  30:24  
I think this might be the same thing. 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? Would someone like me be in a position to be eligible for that type of loan?

John Randall  30:43  
I'm really not sure I've not seen the final language on the paycheck paycheck protection program. I would encourage you to, once again, get your application in for the disaster loan. And then once the paycheck protection program becomes available, apply at that point in time what will have additional details. The prudent thing to do is get in both applications. Okay.

Ed Mysogland  31:11  
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. Do we have to guarantee personally guarantee these loans?

John Randall  31:28  
My understanding once again, and this is not a final bill. So but my understanding is the paycheck Protection Program will potentially not have collateral requirements or personal guarantees.

Ed Mysogland  31:46  
I have been sent a form called the disaster relief payment assistant requests 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?

John Randall  32:01  
So it sounds like you're talking about something specific from your bank tied 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 I believe most SBA lenders are accepting those applications and working to make sure our borrowers are are supported.

Ed Mysogland  32:34  
Okay, can can self employed individuals who do not take a salary qualify?

John Randall  32:41  
They don't know how that's going to work with the paycheck protection program yet. I would get an application in for the disaster loan program right away, even if that's your circumstance, and and look to see what the approval looks like.

Ed Mysogland  32:58  
I have two locations with two different ti NS and separate payrolls, do I have to file two applications for the payroll protection loan, and then two applications for the forgiveness.

John Randall  33:12  
I have not seen the details on how that program is 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. Okay, 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.

Ed Mysogland  33:50  
Okay. Terry, is is this presentation being recorded? And if so, is it distributed? Yes, it will be it is being recorded and it will be distributed within the next couple of hours through if you registered, it'll go it'll go out. It'll also be on our podcast defenders business value as soon as we can get it processed. For these programs, can you comment about personal guarantees and collateral? I think you did a little bit of that.

John Randall  34:19  
I did. I my current understanding, and this is very subject to change on the paycheck Protection Program is that there will likely not be a collateral or personal guarantee requirement. The disaster loan application I believe will likely have a requirement for best available collateral. So it's okay if you have other liens, UCC filings or mortgage lanes ahead of that new lane, but I believe they are trying to take what collateral they can get You know,

Ed Mysogland  35:01  
if a business hires contractors and keeps them hired, does this satisfy the Maintain payroll requirement? Or is it for full time employees only?

John Randall  35:13  
I don't have those details yet. I believe that this applies to full time and part time employees. But we need to see the final bill. To know for sure,

Ed Mysogland  35:25  
okay. If you have, 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?

John Randall  35:40  
These are federal loans, it should not have an impact to the best of my understanding.

Ed Mysogland  35:48  
All right, I heard on the news that along with the paycheck protection program, you would receive an immediate payment of $10,000 for speedy liquidity. Have you heard this?

John Randall  35:59  
I have not heard that doesn't mean it's not true. I just have not heard it.

Ed Mysogland  36:04  
All right. So how many businesses would would this program be likely able to cover the back of the envelope? The back of the envelope calculations look like about 25 to 50% of businesses could exhaust the capital?

John Randall  36:28  
I really can't speculate on that.

Ed Mysogland  36:30  
I was I was wondering what you're gonna say to that. But we print money, you know, that's no problem. Is there a salary threshold level above $100,000?

John Randall  36:43  
Waiting to see the final text of the bill, but I do believe that for the paycheck protection program, there's likely to be a compensation limit. And I have seen 100,000 as the target number for that'll end up.

Ed Mysogland  37:01  
Got it. The next one, so what's the official website for the paycheck protection loan, and you may if you move your your screen back to I'll go ahead.

John Randall  37:15  
But so remember, the paycheck protection loan is not passed yet. So there is not a place to apply for it yet. You will apply through your local lender or somebody like you know, live oak or any of the historic SBA lenders should be providing this once it passes, but there's no place to apply for it yet.

Ed Mysogland  37:47  
We talked about personal guarantees. Next, I'm a dentist with two locations that are two escorts with two different ti NS staff of 66 to eight per location, including my wife and myself joined W twos. I closed March 12. And most likely will not open until at least mid April, do I qualify for any of these loans? Apply?

John Randall  38:10  
I would apply for the disaster loan. And once the $2 trillion stimulus bill passes, and banks have the paycheck protection program up and running, I would apply for that as well.

Ed Mysogland  38:25  
All right. Would these disaster liens only be on the business?

John Randall  38:34  
I can't speak to exactly what collateral the SBA is going to be looking at on the disaster loan. The SBA seven a program looks for any available collateral could be business assets or personal assets like a junior lien against Real Estate. That being said, I don't know the exact collateral requirement on the disaster loan.

Ed Mysogland  39:07  
Okay. Any other questions? I think I've got a couple more just to confirm the disaster loan will be processed and come through the SBA. But the paycheck protection program will run through partner banks like existing seven eight programs.

John Randall  39:25  
That's exactly correct. Okay.

Ed Mysogland  39:29  
If you go one more slide, we had some pregame questions that I think we can answer.

So, John, what do you think? How can we avoid closing our business altogether?

John Randall  39:48  
Tough question. I think that you've got another it's hope and that these programs are coming available. There will be approvals there will be funds they'll be available and potentially forgiven. So keep that in mind as you're making those very difficult decisions.

Ed Mysogland  40:15  
Again, so if we take a business loan, don't get the funds to pay back, I think we you talked a little you touched a little bit on the forgiveness side. I think the third one, we covered through the chat kit, as well as the fourth one, we covered through the chat. The fifth one came through what what does this do to my long term business value? You know, like I said, at the beginning, I mean, I think right now we're, we're, we're, we're posturing how to how to look for survival, not necessarily how to maintain value, but, but I will comment to that, that, you know, business value is based on three things earnings, risk and expectation, you know, stabilize the business. I think John will attest that, you know, when when you do go into buying a company or selling a company down the road, you know, there there will be an income statement adjustment that is, you know, COVID related, and it's a non recurring event. I mean, at least we hope so. And that being the case, you know, that that's an adjustment that I'm certain that the underwriters would look to, you know, that would look and understand that everybody was in the same boat. Risk. I mean, we'll have to address risk, you know, it depends on on the respective company and the expectation forecasting and small business is hard to begin with, you know, what, what is the forecast look like for the next one to three years, that that may be difficult and, and I don't know if the values will necessarily go down, but I think I think structure for future sales will probably have to be augmented and adjusted to accommodate the or mitigate the risk that the buyer is going to take. So, John, let's see, I don't Oh, we've got some more questions. So let's see. So if the paycheck bill passes tomorrow, do we go to the to the bank tomorrow to apply? I think you've said, go to the bank, or go apply today, right?

John Randall  42:24  
I would stay in close contact with a business lender that you know, and trust, so that they can tell you as soon as their applications available. And you can be the first in line.

Ed Mysogland  42:40  
Alright, are there any changes to the SBA seven a acquisition loans? Will lenders continue to provide SBA seven a acquisition loans? If there's a willing buyer willing seller who will want to move forward?

John Randall  42:56  
I think 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 is, 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?

Ed Mysogland  43:35  
Okay. Last call for questions. All right, John. Well, you know what, as always, buddy, I certainly appreciate all the time that that you've you've taken with us and the people that that we have on on this on this webinar, I think. I think as, as small businesses, the continues to be the foundation of our economy, I think this gives people hope. And we go back one, so I can make sure that everybody sees your contact information. Yeah, so this is John's contact information, reach out to him, you're more than welcome to reach out to us at Indiana business advisors. We're happy to connect you to any resource that that we have available, including folks like John. So, John, again, I can't thank you enough for the time and willingness to come talk to all these people.

John Randall  44:32  
Thank you very much. Have a great afternoon.

Ed Mysogland  44:36  
And like I said, we will have recorded the recording available. And we will have it'll be posted on our podcast here within the next couple of hours. Thanks for joining us certainly email us any kind of questions.