Whether it’s to tap new sources of funding or get a break on payments for existing debt, a talk with your banker can help your studio or store get through this cash crunch.
If your dance business is having cash-flow problems because of shutdowns triggered by COVID-19 and you don’t have personal resources to see you through, it’s time to talk to your banker and get help. Whether you have the conversation in person or, more likely right now, by telephone, here are three key questions to ask.
What can you do about my existing business loans?
If you have outstanding loans, such as an SBA 7(a) loan or a line of credit through the bank, you may be struggling to make your next loan payment. Ask your banker whether there is any moratorium on payments required for existing loans. For example, if you have a 7(a) loan, the lender is allowed to defer payments for up to six consecutive months (it depends on whether the lender still holds the loan or has sold it on a secondary market).
If you have an SBA microloan, deferral up to six months is permitted as long as deferment doesn’t cause the loan to extend beyond its maximum six-year maturity.
Ask your lender if you need to submit any financial statements to support your request for help.
How can you help me with my existing personal loans?
You may have a home mortgage, credit card balances, student loans and other personal loans to deal with, in addition to running your business. To the extent you can defer these payments, you have more funds to use for your business. Talk to your banker about these loans and ask if you need to submit any financial statements to support your request for help with the following:
Mortgage: If you have a home mortgage with a bank (it may be a different bank from the one you have your business accounts and loans with), you may be able to obtain mortgage forbearance, which is lowered or suspended payments for a set period (e.g., up to 90 days). For example, Bank of America announced it was open to coronavirus relief requests by borrowers with respect to mortgages, credit cards and other loans. This keeps the mortgage from going into default. Bankrate has a list of banks offering help to customers impacted by the coronavirus.
Student loans: If you have outstanding student loans, you also need to have a conversation with the lender. The new federal law called the CARES Act enacted in March offers six months of federal student loan relief. This is six months of zero interest (from March 13, 2020, through September 30, 2020), which applies to Federal Perkins Loans, defaulted and nondefaulted direct loans, and defaulted and nondefaulted Federal Family Education Loan (FFEL) Program loans. What’s more, no principal payments are required during this period. Anyone who made payments on or after March 13, 2020, can ask for relief from the lender. If there are any problems, call 800-433-3243.
Can you help me get a Paycheck Protection Program loan?
Ask your banker whether the bank is an SBA-certified lender under the 7(a) loan program. This is a yes/no answer. If yes, then consider whether a PPP loan is a good option for you. This is a short-term loan program designed to help you keep employees on the payroll (or yourself, if you’re an independent contractor) and pay your overhead. It requires no personal guarantee, no collateral and involves no fees. You can borrow two and a half months of payroll costs incurred in calendar year 2019 (the maximum loan is $10 million). What’s more, the interest rate is only 1 percent. The loan has a maturity of two years, but there’s automatic deferral for six months (although interest accrues during this period). But there’s potential loan forgiveness of up to eight weeks of funds applied to payroll costs, mortgage interest or rent, and utility expenses. Forgiveness is reduced proportionally by any reduction in the number of employees or 25 percent reduction in payroll as of June 30, 2020, compared to pre–February 15, 2020, levels. At least 75 percent of the amount forgiven must relate to payroll costs.
If this sounds good to you, then ask for a loan application (there’s a special form for this program). The program opened April 3 for small employers and April 10 for sole proprietors and independent contractors. Also ask what financial documentation the bank will need you to provide, such as information from your CPA or payroll service regarding your current and prior payroll information, to complete your PPP loan application.
When to Skip the Talk With Your Banker
If you’re in desperate need of cash for your business, you may want to skip the talk with your banker and go directly to the SBA. Its Economic Injury Disaster Loan, which you apply for directly through the SBA, can be used for working capital to cover operating costs. The interest rate is 3.75 percent, repayable over 30 years, with deferral of all principal and interest for the rest of the year (although interest continues to accrue). What’s more, you can ask for an immediate $10,000 advance once you submit the loan application (for now, smaller advances are being offered until the program gets more funding from Congress). The advance doesn’t have to be repaid, even if your loan request is turned down.
The Bottom Line
While it’s always a good idea to have an active and ongoing relationship with your banker, it’s especially important to be proactive now. Various funding options can help you get through this period, but none of them are automatic. Take affirmative action to secure loans, deferrals, forbearance and other economic relief to see you through this pandemic.
Last updated April 16, 2020
Barbara Weltman, an attorney and small-business expert, is the author of J.K. Lasser’s Small Business Taxes 2020: Your Complete Guide to a Better Bottom Line and publisher of “Idea of the Day” at bigideasforsmallbusiness.com.