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“A nightmare” is how many business owners describe the process of applying for a COVID-19 emergency loan this year from the U.S. Small Business Administration.
That’s because last year, the agency didn’t require backup documentation. It was a breeze to get an Economic Injury Disaster Loan, a low-interest loan for small businesses negatively affected by the pandemic.
But this year, the SBA is requiring that every “t” be crossed and “i” dotted to cut down on fraud. Over 1.1 million EIDL applications are being held up for identity theft reasons.
But the SBA says it still has “plenty” of loan money left and is encouraging business owners to keep applying. That will require understanding the common mistakes leading to loan rejections and how to avoid them.
The EIDL program is a loan directly from the SBA that must be repaid and is limited to businesses and private nonprofits with 500 or fewer employees. The loan term is 30 years with fixed interest rates of 3.75% for businesses or 2.75% for private nonprofits. Payments can be deferred for 18 months for loans made in 2021, although interest will accrue during that period.
Loans are capped at 24 months of economic injury, up to a max of $500,000. The max loan amount for each business is determined by using 2019 average monthly sales to calculate 24 months of injury.
Small businesses can use the loans to make regular payments for operating expenses, such as paying off debts, meeting payroll, rent or mortgage, utilities and other “ordinary and necessary” expenses, the SBA said. The loan isn’t meant to expand a business or start a new one.
Business owners can apply for EIDL loans on the official SBA website. There is no fee for applying, so don’t be fooled by scammers. Applications will be accepted through Dec. 31. To apply, you should have your last 12 months of sales and your business bank account and routing number.
Once your application is approved, the SBA will email you documents to sign. After you send these back electronically, funds should be in your bank account within five to 10 business days. If it’s taking longer, there may be an issue with your banking information and you should contact your local field office, which can be found at sba.gov/about-sba/sba-locations.
If your business has already received an EIDL loan, you may be eligible for an increase determined by the amount you’re eligible for today minus the loan amount you’ve already received. The first EIDL loan program was based on six months of expenses, but that has since increased to 24 months of eligible expenses.
If your application has been declined, your only option is to follow the reconsideration instructions contained in the rejection letter. You can contact your local SBA field office to see if a representative can help review your revised application to be sure it’s eligible and correct. While the agency’s customer service team has been criticized for its lack of knowledge, you also have the option to contact them by phone at 800-659-2955 (800-877-8339 for the deaf and hard of hearing) or by email at DisasterCustomerService@sba.gov.
If you’ve already been rejected and don’t know why or are about to apply, you should know the most common reasons applications are being rejected. The following list comes from SBA resources, as well as COVID EIDL experts.
Applicants are probably used to websites that let you change your name or address on forms if you mess up. The SBA website isn’t sophisticated enough to do this. So if you want cash quickly, you’re better off taking a few extra minutes to review everything than to rush it and have to wait for months to get a rejection letter and then have to reapply. This includes everything from your business name to your email address.
Most often, the problem with the SBA reconsideration process is due to the applicant, not the SBA, said Trevor Curran, who runs a COVID EIDL consulting business called Aurora Consulting in Connecticut with his partner, Linda Rey. People are rushing the applications, and their mistakes are leading to delays, discrepancies and rejections, he wrote in their COVID EIDL loan help booklet.
Put your old address if you’ve moved
The SBA asks business owners to fill out an IRS 4506 form themselves. If you’ve moved, put your old address from your last tax return or the system will recognize it as an error and you will be rejected. Be sure to also date your tax form or it will be rejected in the IRS verification process.
Not meeting the credit score requirement
A minimum credit score of 570 is necessary to be approved for a loan. If your credit score has been damaged during the pandemic, go to annualcreditreport.com to access your report every six months, said Matt Ridge, director of business development at Solaire Capital in New York.
You can then ask the SBA if you can submit additional financial information to show that you will be able to repay the loan, said Ridge, who previously worked at the SBA and personally processed between 5,000 and 10,000 applications for disaster loans.
The business wasn’t in operation on or before Jan. 31, 2020
This is the date that the SBA has officially declared as the start of the COVID-19 disaster.
Putting down the wrong gross receipts, cost of goods sold or expense information
“Most often, what I’m seeing as the primary reason for being declined is the data for revenue and cost of goods sold entered on the original application is incorrect and does not reconcile with the 2019 tax return,” said Curran.
This is arguably the most complex part of the application. First, you want to be sure you’re using information from your 2019 tax returns. The information you input for gross receipts, costs of goods sold and expenses on the COVID EIDL application will differ according to tax return type. Here is a helpful chart from the SBA about what to use, based on your situation.
Economic injury not proven
There needs to be economic injury documented by comparing 2019 sales and operating data with those in 2020.
Your type of business isn’t eligible
The loans aren’t meant for businesses in the following industries: payday lending, check cashing, gambling, adult entertainment, pawn shops, real estate developers or insurance companies. If you feel you were erroneously rejected, you can provide documents about your business operations to request a reconsideration.
“This has been an issue for many clients in real estate-related services,” Ridge said. “Like design and engineering firms with the name ABC ‘Development’ Group would be summarily declined as a real estate developer.”
Ineligible non-US citizen status
Each owner of 20% or more of a business must be a U.S. citizen, non-citizen national or qualified alien. Documents that establish a legal basis to be in the U.S. like a visa document don’t generally convey qualified alien status. For more information, a qualified alien is defined within 8 U.S.C. section 1641.
Failure to respond quickly
The SBA may request additional documents during the loan review process. If you don’t respond within seven days, the application will be withdrawn until you request it to be reactivated. Search through your inbox regularly to check that critical SBA emails didn’t go to your spam folder.
“Respond as soon as possible, even if it’s to tell them you simply need more time to gather the documents,” Ridge said.
“Unverifiable information” is a common reason applicants are being declined, according to rejection emails business owners receive. This is a broad term that can cover everything from failed identity verification to an international IP address to a client device associated with fraud to the business reaching its total federal loan limit of $2 million.
The most common cause for this type of rejection is that the IRS 4506 used to verify your tax returns was declined, Ridge said. If the tax returns can’t be verified due to an address mismatch or missing date, the IRS rejects the request and the loan is declined.
You aren’t a small business by definition
This one is simple. Your business should have 500 or fewer employees.