Many companies have applied for emergency loans backed by the Small Business Administration designed to help them recover from the economic impacts of the COVID-19 pandemic.
Some of these low-interest, government-guaranteed loans will be completely forgivable, others will be partially forgivable, and the rest have terms similar to conventional SBA loans.
Usually, when a company takes out an SBA loan, the lender will want access to all of the company’s assets as collateral should that company default. This includes access to a company’s accounts receivable.
While such a move can solve short-term financing problems for a company, giving an SBA-approved lender access to accounts receivable as collateral can limit the flexibility the company needs to grow. If a company’s accounts receivable are part of the collateral of an SBA loan, that means that the company cannot sell them to a factoring company for working capital or borrow against them for a bank line of credit.
Companies can avoid losing flexibility with an SBA loan by asking the lender not to use the accounts receivable as collateral before the loan is made. Often, lenders will not mind doing this, but companies will need to ask for this option.
In volatile times, companies need to have the most financial flexibility possible. Evergreen Working Capital can help companies work with SBA lenders to maximize your funding options.
The SBA is offering a variety of loan programs to provide relief during the coronavirus pandemic. Here are some of the options and whether they will require you to use your accounts receivable as collateral as default terms.
Paycheck Protection Program
The SBA program offers up to $10 million of forgivable loans if all employees are kept on the payroll for eight weeks. The money can only be used for payroll, rent, mortgage interest or utilities. Companies do not need to pledge any collateral for these loans.
Economic Injury Disaster Loans
This SBA loan allows small businesses to borrow up to $2 million at a 3.75% rate. The SBA will request collateral if the loan exceeds $25,000, but failure to provide collateral does not disqualify the application. Applicants for this loan can ask for and receive an emergency advance of up to $10,000 for this loan, even if the application is declined. The advance will not have to be repaid nor does it require collateral.
7(a) Loans
This is the primary lending program that the SBA-approved lenders offer. Small businesses can borrow up to $5 million for up to 10 years. Lenders are not required to take collateral for loans up to $25,000. For loans over $25,000 up to $350,000, the lender will usually want to collateralize the assets financed with loan proceeds and take a lien on all of the applicant’s fixed assets, including machinery and real estate. For loans in excess of $350,000, the SBA requires that the lender collateralize a loan to the maximum extent possible even above the loan amount. In this case, the lender will typically want to collateralize using all assets, even though borrowers can ask for the accounts receivables to be excluded from the loan package. Evergreen Working Capital can help a company work with its SBA lender to ensure it has the financial flexibility to use factoring.
These SBA loans are for fixed amounts payable over a long period, scaled to a company’s current size. The loans do not account for future growth. When a company starts growing, accounts receivable will also grow and require new cash flow support. Companies should plan for success by excluding accounts receivable from the SBA collateral package. This allows companies to sell their accounts receivable to a factoring company or secure a bank line of credit to fund growth.
If you already have an SBA loan, you can contact your lender to ask them to release your accounts receivable. The process can be lengthy and can reduce your flexibility in a time when you need the working capital quickly.
Seeking relief from the economic effects of the coronavirus pandemic can be complicated, but you should take the time to understand the details and make good choices for your business. Evergreen is committed to ensuring that its clients have the most financial flexibility to make it through this crisis and be in a position to grow in the recovery that follows.