As COVID-19 crisis continues, SBA is saving small businesses
Federal government should increase emergency business loan amounts to $10 million, reduce interest rate
With the world economy in crisis, Congress and President Donald Trump are working at breakneck speed to pass a massive stimulus package. This package is necessary to restore jobs and to stop unemployment from reaching 20%.
Lawmakers aren’t alone in taking action to stave off coronavirus-induced economic disaster. The Small Business Administration (SBA) has issued new criteria for working with states to provide economic disaster loans to businesses across the country – a necessary change to support the backbone of America’s economy. These criteria include up to two million dollars per loan for businesses with 500 or fewer employees, with a 3.75 percent interest rate and repayment terms for up to 30 years.
As small business owners, we applaud the SBA for its decisiveness. Widening the definition of a disaster from a physical event like Hurricane Katrina to an economic disaster like the current crisis will pump necessary money into the small business community. So will increasing loan ceilings and allowing small business owners more time to pay back loans.
The SBA’s actions will especially help the four million federal contractor employees who are particularly vulnerable at this time of crisis. The SBA’s new, flexible funding limits will be a lifeline for small business contractors who may be forced to work remotely due to coronavirus concerns. While remote is the new normal for many businesses, many contractors cannot complete their top secret or classified work remotely – which will leave them in dire circumstances when they are not paid.
Loan repayment extensions will also help companies on the other side of this economic disaster, as lowering their payments will reduce their monthly debt burden. Paying more on the back end of a longer loan is something small business owners will gladly do if the alternative is losing contracts or going bankrupt. Like so many other companies, government contractors who find themselves short on cash would be given more time to find new business to pay down these loans.
Many small businesses will benefit from these changes, but none more so than government contractors because of the very nature of how they serve the American people. There is often a very short ramp-up time for a small business that secures a modest or large contract. This can mean funding hundreds of thousands or millions of dollars in new staff, product, and equipment costs for months before the first payment arrives. And if the government starts cancelling contracts or delaying payments, contractors may find themselves in dire straits.
In addition to these excellent solutions, the SBA should consider making temporary exceptions for some of the qualifying factors for traditional SBA loans. Many government contractors, especially start-ups, will not have the credit history and history of profitability to qualify. What they do have is years of booked contracts with secured revenues which they can use to pay back loans. This means that as long as the business executes the contract, the money is virtually guaranteed to be paid by the federal government.
Finally, the SBA should consider increasing 7(a) standard loans from the current $5 million maximum to $10 million, reduce the interest rate, and increase repayment terms from 10 to 20 years. Like the economic injury loan changes the SBA is already pursuing, these 7(a) changes would further improve contractors’ ability to weather this economic crisis.
The financial tools the SBA is pursuing and which we recommend are drastic – but so are the circumstances in which contractors find themselves through no fault of their own. And with small business contractors serving as the backbone for many of the critical services which keep the government running and maintaining national security, it is imperative to keep them operational. The SBA is acting admirably and quickly to keep these companies afloat by creating loan packages and policies which are flexible enough to meet the needs of small businesses – and it should go even further to keep private-sector public servants employed
Ed Bersoff is co-founder and chairman of McLean-based Parabilis, a strategic financial partner for small business government contractors. In 2019, he was inducted to the Greater Washington Government Contractor Hall of Fame for his 50 years of leadership in the industry.
Bruce Lyman is CEO of Parabilis. A former Air Force Colonel who served in Iraq and Afghanistan, he previously founded and led a government contracting firm specializing in IT services.