COVID-19 Loan with Bad Credit? Small Business Loans Under the CARES Act
Can you get a COVID-19 Loan with Bad Credit? With the continued spread of the COVID-19 pandemic in the United States, small businesses around the country have been looking for quick ways to access working capital to shore up their cash flow and pay operating expenses. Some of the more appealing options for small businesses have come about as a result of the Corona virus Aid, Relief, and Economic Security (CARES) Act, which was passed by congress and signed by President Trump to combat the economic fallout resulting from the pandemic. Through this act, small business owners can now apply for two different types of loans, including Economic Injury Disaster Loans (EIDL) that include up to a $10,000 advance grant and Paycheck Protection Program (PPP) loans. Both of these loans programs are run by and offered through the U.S. Small Business Administration (SBA).
The financial relief funds provided from these SBA loans can be used to pay a number of operating expenses, including payroll, mortgage payments, rent, loan payments and more. Both of the loan offerings from the SBA are interest loans, however, Paycheck Protection Program (PPP) loans can be forgiven by as much as 100% of the loan amount if loan borrowers keep all of their employees on their payroll for eight weeks and use at least 75% of the funds provided by the loan for employee payroll costs. These payroll costs include wages, salary, commissions, tips, sick leave, parental and family medical leave, and any other payroll associated expenses. With the exception of the $10,000 emergency grant, which does not have to be repaid, the EIDL loans do not offer a forgiveness option.
Despite these loan programs being a strong option for small businesses, many businesses have been concerned about their ability to obtain approval for them on account of their poor credit score or a prior or pending bankruptcy. Indeed, during a recent Biz2Credit webinar on a related topic, questions pertaining to the ability of small businesses with poor credit or a past bankruptcy, particularly Chapter 13 bankruptcy, to obtain an SBA loan were a big concern. SBA small business loans have a history of being difficult to qualify for, and though the standards have been relaxed in light of the economic situation stemming from the coronavirus pandemic, there are still a lot of unanswered questions. In this article, we’ll go through some of the options for small businesses suffering from bad credit scores and/or a history of bankruptcy.
How is a Credit Score Considered when Applying for EIDL and PPP Loans?
Though a business’ credit score is typically a large factor in the consideration process under traditional SBA small business loans, credit scores are supposed to play a much smaller role in COVID-19 loan assistance programs.
Economic Injury Disaster Loans (EIDL)
For businesses applying for SBA Economic Injury Disaster Loans (EIDL) following the implementation of the new guidelines and $10,000 grant program set up by the CARES Act, credit score is considered when determining the size of your loan. The better your credit score, the larger the EIDL loan your small business will qualify for.
Having a poor credit score should not stop you from applying for an EIDL loan. Under the new guidelines, the SBA is supposed to be flexible, even if your business has a bankruptcy in its history. Remember, the idea is that the loans are not just supporting your business, but also the workers and employees who rely on the paychecks your write them every month. As a result of this, the federal government is trying to get relief funds to as many businesses as possible. In fact, in a recent webinar, Alex Contreras, Director of Preparedness, Communication & Coordination at the Office of Disaster Assistance at the SBA, noted that the SBA is working to be as accommodating possible given the circumstances. In some instances, they are not even considering your business’ ability to repay the loan.
More importantly, even if you do not end up getting accepted for a loan, you can still get the $10,000 emergency grant, which does not have to be paid back even if your application is denied. Even better, the $10,000 is supposed to be provided to your business within a week period of your loan application submission, as it is supposed to provide businesses with fast working capital while their loans are considered.
Further, once you complete your loan application, you will be assigned a loan officer. They will be able to assess your business standing in a more complete and thorough way, so reaching out to them is a great way to get a deeper understanding of how your credit score is impacting your application.
Paycheck Protection Program (PPP) Loans
Paycheck Protection Program (PPP) loans are being given to businesses on a first-come, first-serve basis, with a 1.0% interest rate. Though financial institutions participating in the SBA loan program are not required to consider the loans in the direct order of the receipt of applications, they are still supposed to follow the general trend. Once again, PPP loans are not emphasizing credit scores in a traditional manner, and having a poor credit score should not severely inhibit your business’ ability to receive funding. Yes, you may not receive as much funding as a business with a stellar credit history, but odds are you will still receive some funding.
Remember, and we can’t stress this enough, in order to be eligible for PPP loan forgiveness, your business must use at least 75% of the funds toward some form of payroll expenses (the SBA has clarified that payments to independent contractors and service providers do not count as a payroll expense under their loan terms). This means you need to be diligent in your allocation of the funds. The other 25% can be used towards specific categories as outlined by the SBA and your loan provider. Failure to follow these guidelines could lead to penalties and result in your business being fully responsible for the loan. Once you receive a loan, you should be assigned a representative who you can contact. When in doubt, contact them. The last thing you want is to find out that the incorrect allocation of your funds has made your business ineligible for a loan refund.
As a quick side note, if you manage to obtain both an EIDL and PPP loan, which is allowed under the current rules, you cannot use the funds from the loans towards the same categories of expenses. This means if you have a PPP loan, you cannot use your EIDL loan funds toward payroll.
What Benefits are Still Available If Your Business Does Not Participate in the Loan Programs?
Even if your business does not obtain an EIDL loan or a PPP loan from the small business administration, there are still a number of relief programs initiates by the CARES Act that your small business can take advantage of.
Payroll Tax Deferrals – Notably, the employer side of social security payroll taxes, which represents a tax of 6.2%, can now be deferred. Deferment of these taxes lasts for a period of one year for 50% of the amount due and two years for the other 50% of the amount due. Taxes incurred during the period starting after March 12, 2020 and extending through the end of the calendar year are eligible for deferral, and they will be due on December 31 of 2021 and December 31 of 2022 in the 50% increments are previously noted.
Additionally, if your small business does receive either an EIDL or PPP loan, you are still eligible to defer your payroll taxes until you receive loan forgiveness.
Payroll Tax Credit – as part of an effort to incentivize businesses to keep their employees on the payroll, the United States is now offering employee retention payroll tax credits. The credits are refundable credits against the social security taxes that businesses have to pay. These can amount to as much as $5,000.
To be eligible for these tax credits, your businesses operations must have been impacted in one of the two following ways:
- Your businesses operations must have been either partially or fully inhibited or suspended by measures taken to combat the spread of the COVID-19 virus in the United States.
- Your business must have experienced a significant decline of at least 50% in gross receipts for one calendar quarter, which will be compared with the matching calendar quarter of the previous 2019 calendar year.
Triggering either one of these will make your business eligible. Similar to the deferral program, these credits are based on taxes incurred during the period starting after March 21, 2020 and lasting until the end of the 2020 calendar year.
Small businesses that access either an EIDL or PPP loan are not eligible for these tax credits.
Continue to Research Other Loan Programs and Options
Even if you have submitted a loan application for either an EIDL or PPP loan you should not sit back and relax. There are a great deal of things you can continue to do during this time to help keep your business afloat. For one, it is possible that your loan application will be denied, so you should be researching other loan options. Many states, such as Florida, are currently offering state-backed bridge loans which can help your business. You can also look into alternative lenders as a way to access credit during this time. Plus, many local communities are assisting their local businesses, with many non-profits working to provide low-interest loans or grants for small businesses. Your business might qualify for one of these programs.
Whatever you do, you should make it a priority to give your business as many options as possible for obtaining working capital. The last thing you want to do is start taking on personal debt or racking up credit card debt. Credit card interest rates are and always have been exorbitantly high. Don’t wait until the last minute when credit cards become your only option. Even if you aren’t in a cash flow pinch now, you could end up in one. By being proactive and researching the opportunities available for you, when the time comes that you need credit you’ll already have it lined up.
One more thing your business should keep an eye out for is collateral and personal guarantee requirements. Many loans, including the EIDL loans being offered by the SBA, require collateral or a personal guarantee. In the case of the SBA EIDL loans, any loan above $25,000 will require some form of general security collateral, while loans exceeding $200,000 will require a personal guarantee. Personal guarantees can put your personal finances and assets at risk, so, as always, before signing a loan make sure you have read all of the terms and conditions and understand exactly what you are agreeing to.
Additionally, you can help your business in other ways besides applying for loans. If you are a restaurant, figure out how you can stay open and continue to deliver or provide take-out services. Continue to interact with and engage with your customers online through social media and email. Let them know what kinds of precautions your business is taking and how you are supporting the local community.
There are also a number of free advertising opportunities your business can utilize, such as the grants and assistance Facebook, Hootsuite, Google, and Yelp are offering.
Last but not least, consider developing a business continuity plan. The best thing you can do right now is plan for the future, both the short-term and long-term. In doing so, you can make sure that when the pandemic ends and life resumes as normal, your business can hit the ground running!
Be Patient with the Process and Don’t Get Discouraged
If you have been reading the news on COVID-19 loans lately, you will see a lot of negative press about the lack of organization and clear standards. This is to be expected, especially because the program experienced a massive wave of applications, which only continue to pour in. As such, it is important you are patient with the process and don’t get discouraged.
At the same time, you should not become lackadaisical about the process either. Funds for each program are limited, and while Congress and President Trump are looking to pass another supplementary stimulus bill there are no guarantees that it will happen. In fact, shortly after the program went live, Wells Fargo, which committed to providing $10 billion worth of loans for the program, stopped accepting applications for the Paycheck Protection Program (PPP) on account of the fact that they received enough to meet their commitment and couldn’t handle the influx. As such, if you are planning on applying, now is the time. And once you are assigned a loan officer, the faster you respond to their requests and inquiries for more information, the faster you will get a decision.
Be patient, but be proactive.
Having a poor credit score can be really stressful for a small business owner, especially in a time of economic uncertainty when the need to obtain loans becomes vital. However, this should not stop you from applying for financial relief. Given the unprecedented circumstances of the COVID-19 pandemic, the United States Federal Government and Treasury are doing a great deal to try to provide businesses with working capital. So don’t hesitate to fill out a loan application. The worse that can possibly happen is your business is denied, leaving you in the same spot as you would be if you hadn’t applied at all. Plus, the Treasury and SBA have stated that the loan application process has been streamlined so that it should only take approximately 2 hours to fill out the loan application form. This means there are essentially no barriers to submitting an application.
It is important to remember that even though the SBA has relaxed its qualifications and credit score standards, this does not mean they have or will cease typical credit reporting practices. If your business fails to make loan payments on-time or defaults, it will be reported to the typical credit bureaus and you will be assessed other late fees and typical penalties associated with late payments and defaults. So make sure you can afford whatever you sign up for.
Finally, even if you ultimately are unsuccessful in obtaining an SBA small business loan, don’t forget about the many other small business relief programs being offered during this time. Whether its tax deferments or tax credits, there are still ways you can save valuable resources for your business. Through researching and taking advantage of all the opportunities presented to your business, you can make sure that your business is still around to take part in the good times that are sure to come!