Small businesses tend to be hit the hardest during a crisis. The COVID-19 pandemic is a familiar, if overused, example of how a single disaster can upend operations, affecting supply chains, staffing, revenue, and cash flow. If the pandemic proved anything, it’s that unlike larger companies, small businesses often lack the financial cushion and resources needed to weather prolonged disruptions.
Thus, when it comes to periods of economic turmoil, access to capital and resources matters. The same set of circumstances that a medium or large enterprise might recover from can completely devastate a small business.
That’s where economic recovery loans come in. They give you the gift of immediate liquidity and the ability to retain jobs for staff, along with restocking inventory.
Let’s explore everything you need to know about economic recovery loans for a small business.
Understanding Economic Recovery Loans
The whole point of these loans is to ensure the survival of your business. So, you are given the freedom to use the funds according to your most pressing needs. These loans can help cover salaries or resume services that you had to pause due to a lack of funds. They are, in a sense, multi-purpose loans.
These types of loans are typically offered by government-backed programs. However, even commercial banks and third-party financiers now offer these loans. They often come with benefits like partial forgiveness, slightly lower interest, and a certain allowance for deferred payments.
Options for Economic Recovery Loans for Small Businesses
The Small Business Administration (SBA) offers quite a bit of help for entrepreneurs and small businesses. This is a government agency, and SBA Loans are one of the many resources they provide. Let’s look at a few options that can work well if you need to get your business back on its feet.
SBA Economic Injury Disaster Loans (EIDL)
If you need an economic recovery loan for a small business, EIDL is one of several options available. These loans are commonly used by businesses located in a declared disaster area. As SBA notes, the main eligibility criterion for EIDL is when the small business wasn’t able to obtain credit elsewhere. If eligible, you might be glad to hear that your interest rates won’t exceed 4% and payments are deferred for the first 12 months.
SBA 7(a) Loans
The SBA 7(a) loan is one of the most common loan types and helps small businesses with several needs. Like EIDL, the SBA 7(a) loan is also meant to help small businesses that have difficulty finding financing elsewhere.
You can receive this loan if you operate in the U.S, are a for-profit small business, and meet other SBA eligibility requirements. The maximum amount you can borrow for this kind of loan is $5 million.
SBA 7(a) loans are unique because lenders are provided a government-backed guarantee up to 85% on loans of $150,000 or 75% on loans up to $5 million. This makes it easier for small businesses to get the financing they need.
SBA 504 Loans
While this type of loan also has a maximum amount of $5 million, the difference lies in its purpose. SBA 504 loans are specifically meant for fixed asset purchases and come with more favorable interest rates along with longer terms. For example:
- Buying Long-term machinery with a useful life of at least 10 years
- Refinancing certain qualified debt tied to fixed assets (under certain SBA regulations)
- Purchasing owner-occupied commercial real estate
This type of loan cannot be used for working capital, inventory, speculation, or investment in rental real estate, among other conditions.
SBA Express Bridge Loans
If you already have an existing relationship with the SBA, you can get quicker approval for short-term cash needs. Typically, express bridge loans are fast-track loans of up to $25,000. They are a great option if you are waiting to receive other long-term financing and need quick cash for any immediate business needs.
Local/State Economic Recovery Loan Programs
While SBA loans are often the first port of call for small businesses, they are not the only government agency that offers help. In times of disasters, including economic ones, your local government may offer its own loan programs.
However, these tend to have certain caveats, such as limited funding (meaning a first-come, first-served model). Similarly, you may have to prove how your business was impacted, which can sometimes be a tricky process.
What Are Third-Party Financiers and How Can They Help?
These are alternative lenders, Non-Banking Financial Companies (NBFCs), Community Development Financial Institutions (CDFIs), and private lenders that offer loans to small businesses.
They tend to offer faster processing and have fewer eligibility requirements compared to SBA loans. Sometimes, these third-party financiers also work with the government to help small businesses, such as with SBA 7(a) loans.
Application Process
When it comes to availing economic recovery loans for a small business, the application process (especially for SBA options) can be daunting. Let’s look at a few ways to make things easier.
Identify a Suitable Scheme
Take a look at your business situation. Ask yourself questions like: What does the business need right now? Do you need quick cash, or is the priority long-term investment capital? Once you identify your need, you should then look into which federal, state, or private program aligns with your needs.
Prepare Documentation
Having your documents in order is important no matter what situation you are going through. Even if your small business is doing well and you don’t need loans, you never know when a natural or economic disaster can overturn things. To be on the safe side, ensure you have the following items updated and ready for review:
- Financial statements (profit and loss, balance sheet, cash flow statements, etc.)
- Tax Returns
- Business Plan / Recovery Plan
- Proof of Ownership and Legal Structure
- Bank Statements
- Debt Schedule
- Business Credit Score
- Payroll Information
- Insurance Documentation
- Collateral Documentation
With alternative lenders like Fast Business Financial, the documents required may be less intensive. Still, it’s good practice to keep these items on hand and updated.
Submit Application
The number one tip when applying for a loan is to always double-check. In fact, go ahead and triple-check your application. It’s incredibly easy to accidentally leave out a missing attachment or leave a section blank.
If you’re worried about making such mistakes and you don’t have the time, remember that most government-backed programs also offer online applications. Often, the website will only allow you to click submit when everything is in order.
Loan Assessment
Once you submit your application, your documents will be reviewed. If everything checks out, the lender conducts a creditworthiness evaluation. This is to assess whether you are someone who is capable of repaying the loan. Your financial health will come under scrutiny, and a business viability check may be carried out.
In some cases, your use of past aid might also be reviewed to ensure you aren’t trying to double-dip. Final approval depends on the kind of loan as well as the financier. Some alternative lenders can give you approval within 24 hours. Otherwise, timelines can vary, often ranging between one to four weeks.
Frequently Asked Questions
What expenses can I cover with an economic recovery loan?
You can expect to use the money to pay for rent, vendor payments, inventory, and, in some cases, to refinance any existing business debt. Each loan type tends to have a range of permissible use cases.
Are economic recovery loans available if my business has a low credit score or limited collateral?
Yes. Government-backed ones are specifically meant to help businesses in distress. So, while they still care about creditworthiness, they will also look at factors like cash flow projections instead of outright denying loan approval.
How fast can I expect funding to be disbursed after the approval of the economic recovery loan?
As mentioned earlier, loan disbursement time depends on the lender as well as the size and kind of loan. SBA loans tend to be paperwork-heavy, so expect disbursement to take several weeks. Private lenders may release funds earlier, but they sometimes come with higher interest and other factors to consider.
What happens if I’ve already received other forms of government relief funding?
You can still apply for aid as long as you disclose prior aid. Some loans can reduce your eligibility or funding amount, and penalties might be levied (especially for SBA loans).
Likewise, whether the forgiven portion of a loan affects your eligibility for new funds is something to investigate. So it’s probably a good idea to speak to a loan consultant if you’re unsure.
Can economic recovery loans help build my business credit?
Yes, in the sense that you report regular repayment to credit bureaus. The timely repayment will improve your credit profile, which is important if you anticipate needing more funds in the future.
An Economic Decline Doesn’t Need to Be the End of Your Business
It’s easy to go into panic mode when natural or economic disruption threatens your operations. After all, as a small business owner, you probably have heard all the warnings about how most businesses don’t succeed. It’s natural to wonder if the same is happening to you.
Thankfully, the government and financial agencies have a vested interest in ensuring that your operation continues to thrive. Economic recovery loans for small business owners exist and can tide you over until your business gets on its feet again.
Take the First Step Toward Rebuilding Your Business After a Setback
If you need help getting your business back on its feet, you need all the help you can get. We at Fast Business Financial are an alternative lender that can help you secure quick funding through a variety of loan options. These include term loans, SBA loans, business line of credit, and more. Our simple application process makes financing easier than you imagine.