SBA pays you to start a business?
In March of 2020 congress passed the The Coronavirus Aid, Relief, and Economic Security or (CARES) Act. This provided stimulus checks, support for state and local governments, and financial relief for small businesses. In Section 1112 congress set aside $17B in order to cover the principal, interest, and any fees associated with SBA loans from the passing of the law until Sept 27th 2020. This provision was to make 6 loan payments and used to give the most vulnerable of businesses a better shot of survival.
There was no application, sign up, or credit check. The banks simply informed the borrowers they would be receiving the subsidy automatically. I know this was a relief to several of the businesses that I know and work with. For gyms, day-spas, and restaurants this would mean one less fixed cost they would have to worry about during the pandemic. While this did help businesses who previously had SBA loans, it also meant that if you were looking to borrow money, and you qualify for a SBA loan, you could get the first 6 months of your loan paid for.
This caused a lot of applications to start to flow into lenders as businesses say it as a way to expand and get at least a portion of the loan paid for. Although it is a worthwhile program entry is not as easy as you would think. In order to qualify you would have to show that you do not have the ability to find traditional financing elsewhere such as a start up, or highly risky business and you would still have to show positive cashflow and the ability to pay the loan back. The credit stipulations would still hold and you would not be eligible with a credit score below 550. Although I like SBA loans and highly recommend them they are more involved than a traditional loan. If you want more detail about the process check out this video on SBA loans. https://youtu.be/0inabMV2-9s
With the passing of the consolidated appropriations act of 2021 this program was extended to included an additional 3 months of payments for existing loans and another possible 5 months to those businesses that were shuttered or severely impacted. There are additional caps and rules associated with the new program such as a max loan payment cap of $9,000 per month for existing and new loans although it does not state how it would be affected over that amount. There is an issue that has not been addressed and that is the so-called donut hole that exists between September 27th and December 22nd. There is nowhere in the language that addresses this timeframe and I find it odd that they would carve out any period of time so we will have to wait to see if additional guidance is released.
Back to how the SBA pays for you to start or buy a business. If you were to apply outside of that donut hole then yes the SBA would in essence pay for you to start a business but let's talk about the real costs of free money. Typically the process is more complicated and due to the riskiness of the loan you will pay a higher interest rate, and a majority of the time that rate is a floating rate that adjusts with the prime interest rate.
The real effect is lets say a $100,000 loan you have for 10 yrs. If you rate is 2.25% higher than prime, which is the current cap on SBA loans you would pay $36k in interest. On a traditional small business loan you will pay $24K or $12K more. The payment on the loan would be $1,135 given you would receive 9 months of payment subsidy you would get $6,810 in subsidy. Over the life of the loan you will still pay more than a traditional loan. With the new law came another provision that the SBA would waive certain origination charges called guaranty fees. This is a percentage of the loan paid up front for your right to borrow money. This fee can range from 1% to 3% and is applied on a progressive scale.
So yes, you would be paid to start or buy a business but I would hope this would not be your only motivation to start a business and simply a bonus to the process you are already going through. Up until the last few months having an SBA was always looked at as a second class loan, but with the passage of these two laws it makes them more appealing than a traditional loan. This is also why I believe they have placed additional caps on amounts due to the fact of many people wanting that “Free money”
If you are a business that could benefit from having an SBA loan go to the lender match site and meet with a lender. You may be able to refinance existing high interest debt into a manageable rate and term and possibly benefit from the loan subsidy program.
