Many entrepreneurs are applying for (or at least considering) an Economic Injury Disaster Loan (EIDL), as a response to business damages created by the coronavirus pandemic. The emergency loan, obtained through the Small Business Administration but backed by the federal government, can provide up to $2 million to cover the temporary revenue losses you may be experiencing.
Of course, the idea of taking on more debt when things are so unsettled can seem daunting, especially if your business is getting by fine for now as long as the crisis passes in a month or two. But what if everyone is essentially quarantined for months on end? And if you're already experiencing losses, how much additional debt should you realistically take on?
As an advisor to business owners on access to capital, here are my recommendations to consider when it comes to loans right now, whether you think you need one or not.
If your business is impacted, you can double down on loan applications.
In addition to securing an emergency loan, you can also apply for a regular SBA-backed loan through a bank or other lender. There are about 2,200 banks and lenders nationwide that process SBA-backed loans, which come with generous repayment terms and low interest rates.
There's no law prohibiting you from only applying for one kind of loan, and you will increase your chances of getting some kind of relief by applying for both. If you do land one loan first, you will need to advise the other lender that you have the new debt. That could preclude you from the second loan. But at least you increase your chances of receiving significant financial relief as fast as possible.
Keep in mind, if your business was in a solid position last year, you are likely to get a bigger loan through a typical SBA program like 7(a), your approval odds are probably better than an emergency loan, and you may well get your loan faster.
If your business is not impacted yet, a SBA loan offers peace of mind.
Think of the SBA loan as an insurance policy. For example, let's say you secure a loan for $250,000, but you're able to muddle through without using it until things return to normal. You can then pay back the entire loan without penalty.
Now consider that same $250,000 loan, which you end up needing to tap into down the line, at least partially. Not only do you save your business, but when things revert to "normal" and your bottom line recovers, you can use the remainder of the loan to grow your business. Or you can pay a significant chunk back right away.
Also, the SBA loan is the gold standard in lending with an unbeatable combination of generous terms, a 10-year amortization period, and low rates. So that $250,000 loan at eight percent over 10 years might only cost you about $3,000 monthly.
In these unchartered times, there's no downside to entrepreneurs being overly prepared from a financial perspective, especially when the SBA loan has minimal negatives.