With PPP On Pause, Where Can Small Businesses Get Loans?

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Since the Paycheck Protection Program (PPP) stopped taking applications on Aug. 8, small businesses struggling in the wake of the COVID-19 pandemic are left with few options for additional financial assistance.  

The $521 billion disbursed via the PPP attracted more than five million applicants, largely due to potential loan forgiveness if the funds were used for eligible expenses, like payroll and rent.

Yet nearly half of PPP loan borrowers anticipate requiring additional financial support over the next year, according to a National Federation of Independent Business (NFIB) Research Center survey. 

Deadlocked Negotiations Leave Small Businesses in the Lurch 

The PPP was one of the sticking points in Congressional negotiations for a second stimulus package. Disagreement on this point included how much additional PPP assistance to offer to small businesses. It appeared likely that the PPP would continue to exist in some form, with the possibility of a second round of loans for some businesses.

Talks between Democrats and Republicans in Congress have ground to a halt, however, leaving entrepreneurs with no clear idea about what additional PPP aid they can expect in the future.

According to the NFIB survey, 23% of small business owners reported that they would have to shut down if current economic conditions did not improve over the next six months. Another 22% of owners anticipated they would be able to operate no longer than 7-12 months under current economic conditions.

There are a handful of additional programs available for small business owners, although they offer loans that must be repaid, unlike the PPP.

Small Business Owners Still Have Options

Prior to COVID-19, a small business seeking extra capital could apply for a loan at a local bank or credit union. Today, underwriters are much less likely to approve a loan for a business that may never return to full capacity, according to Brian Marks, a professor of economics at the Pompea College of Business at the University of New Haven.  

“When you’re looking for avenues for funding, there aren’t many options. Congress has yet to re-up the PPP, and what financial institution would be willing to provide a loan to a small business that is already cash constrained due to the pandemic?” said Marks.

Business owners seeking relief who can’t wait out the second stimulus gridlock should consider the following three options. 

The SBA Economic Injury Disaster Loan (EIDL) Program

The Small Business Administration’s (SBA) Economic Injury Disaster Loan (EIDL) program is still accepting applications. It offers low-cost loans to private businesses and non-profits, although these loans must be paid back. 

EIDL loans are available in all states and territories. They provide working capital to small businesses and non-profit organizations of any size that have suffered substantial economic effects as a result of COVID-19.

The loans are available for terms of up to 30 years, with payments deferred for the first year. The EIDL program charges interest rates of 3.75% for businesses and 2.75% for non-profits.

Do not confuse this program with EIDL Advance, which was an SBA grant program. The EIDL Advance program shut in July after disbursing its entire $20 billion allotment. 

The Fed’s Main Street Lending Program (MSLP)

The Federal Reserve launched the Main Street Lending Program (MSLP) in June. It offers five-year loans sized at $250,000 to as much as $300 million.

There are differing eligibility requirements and terms for businesses and nonprofits, but either way the program is designed for companies with financially sound balance sheets. This would exclude any business hoping for a last-ditch loan to save them from folding permanently. 

Generally MSLP business loans charge interest rates pegged to LIBOR—the benchmark lending rate—plus an additional 3%. At recent LIBOR rates, interest rates on MSLP lending would be around 3.16% to 3.25%.

The repayment schedule is as follows: Payment of principal is deferred the first two years, while payment of interest is deferred the first year. In years three and four, 15% of the principal loan plus interest is due. In year five, the remaining 70% plus interest is due.

Community Development Financial Institution (CDFI) Loans

Community Development Financial Institutions (CDFI) are charged with helping low-income communities get access to credit. Certified CDFIs are eligible for funding from the U.S. Department of the Treasury’s CDFI Fund.

CDFIs include credit unions, banks, loan funds, and venture capital funds. There are thousands of CDFIs around the country. Businesses interested in pursuing a CDFI loan can search the CDFI’s database to review current programs in their area.

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