As the world navigates the effects of COVID-19, people are grappling with a variety of new challenges. Many are struggling to cope with the potential physical, mental, sociological, security, and logistical changes that the quarantine causes. Additionally, many businesses and individuals alike are feeling mounting financial pressure.
Many homeowners and renters are worried that they may not be able to handle their financial obligations due to increasing layoffs, a drop in working hours, or missing work for health reasons. Drops in operating hours and complete business shutdowns have owners concerned as to how they will be able to pay their workers, keep their businesses afloat, and afford personal expenses.
Although the future may appear uncertain for many, there are some potential options that can help people weather the storm.
Loan and Rent Deferment
The continuing issue of COVID-19 has led to shutdowns of large portions of the economy. As a result, many have seen a significant decrease in their working hours, and some have experienced layoffs. Consequently, workers and business owners alike are encountering pay and revenue cuts. Businesses and their workers are scrambling to manage their finances, including making payments on their loans and rent.
Loan Deferment
One of the options that may be available to those in this situation is a loan deferment. A loan deferment is a set amount of time where the borrower or renter does not have to make principal payments to the lender or landlord. The borrower will typically apply for a deferment when circumstances like unemployment, school, and military obligations render them unable to make their payments.
A deferment is typically negotiated in advance between the two parties, and one of the first steps includes the renter providing a viable reason as to why they need the delay. Depending on the terms of the deferment, the landlord may also waive the interest payments for the borrower or renter during the deferment period. On March 13, the Federal Deposit Insurance Corporation (FDIC) began encouraging financial institutions to implement policies which will assist customers and communities affected by COVID-19.
Additionally, the FDIC has provided a page on their website as a resource for both banks and their customers. In following these guidelines, major banks like Citibank and Bank of America have offered a variety of relief options to their customers. Some of them have aided small businesses, consumers, mortgage borrowers, auto borrowers, and more through deferment options and refunds on late fees. Customers should contact their lenders to see if they offer special COVID-19 deferment.
Rent Deferment
With hours decreasing and businesses shutting down, business owners and individuals alike are wondering how they will be able to make rent payments. Renters fear that missing these payments will potentially result in mounting bills and even eviction. Additionally, landlords often rely on rent payments to finance the mortgage on their properties, or for their incomes in general. Unfortunately, many renters and tenants have not planned for incidents like these, and as a result, it puts both parties in a tough position.
Landlords and their tenants must work together to establish a plan or agreement which will mitigate losses for both parties during this time. Larger property management groups are more likely to be able to cope with missed rent payments. Unfortunately, most individual renters will be less likely to afford a rent deferment. If smaller renters are totally unable to provide a deferment, they may be able to grant their tenants a grace period on their monthly rent dues.
However, due to the evolving nature of the situation, it is currently impossible to say how long an appropriate time frame for a deferment or grace period should be. Deferment periods vary, but landlords usually defer payments for 90 days. It is not uncommon for landlords to allow tenants to add the missed payment(s) on to the end of their lease to be paid at its expiration, while others set up systems for tenants to pay off deferred rent incrementally. Nevertheless, tenants should strive to pay their rent on time until they can reach an agreement with their renters. Each renter will differ in their offerings, so tenants must contact them and ask about any available payment options.
Government Assistance
On March 18, the federal government enacted The Families First Coronavirus Aid Package. The package includes benefits like paid sick leave, free virus testing for uninsured individuals, unemployment assistance, general Medicaid funding, and food aid. The Department of Housing and Urban Development has put a sixty-day moratorium on evictions and foreclosures for single-family homeowners. To qualify, they must have mortgages insured by the Federal Housing Administration. Additionally, mortgage lenders Freddie Mac and Fannie Mae will suspend evictions and foreclosures for at least 60 days.
Some state and local governments have signed financial aid packages into effect that aim to help individuals and businesses affected by COVID-19. Many of these include mandates that assist tenants during this time, a time in which many are unable to pay their rent. For example, California has placed a temporary moratorium on evictions and mandated that essential utilities remain on, regardless of payment from the tenant. Additionally, New York implemented a ninety-day mandate protecting commercial and residential tenants.
On Sunday, Oregon rolled out an order temporarily barring landlords for evicting renters for nonpayment, and Utah will soon offer deferment plans for tenants in the state. Local governments like Seattle and Miami-Dade have also taken similar action via the court system. As time passes, more state and local governments are adopting laws that assist businesses and residents. Although some of the state and local measures are barring evictions and foreclosures, but are still requiring rent and mortgage payments, they may change with the evolution of the overall COVID-19 situation in the U.S.
Small Business Association Assistance
The Small Business Association (SBA) has published its options and resources which aim to assist small businesses affected by the COVID-19 pandemic. This comes as the White House implemented the Coronavirus Preparedness and Response Supplemental Appropriations Act, which included an allocation of $20 million to the SBA.
To keep loan repayments affordable, the SBA provides products with long-term repayments, up to a maximum of 30 years. Terms are determined on a business’s particular situation and based upon each borrower’s ability to repay. These Economic Injury Disaster Loans are one component of the federal government’s comprehensive response to COVID-19. Although the SBA’s programs are only one part of a comprehensive effort by the federal government, that part can be critically useful to small businesses and their workers in the current economic climate.
SBA Economic Injury Disaster Loan Program
The first of these offerings is the SBA Economic Injury Disaster Loan Program. This program is the SBA’s new addition to its disaster assistance program. The offering provides low-interest working capital loans up to $2 million for businesses and nonprofits affected by COVID-19. These loans have an interest rate of 3.75% for small businesses and 2.75% for nonprofit organizations.
A governor must request access to this program for businesses in their state to be eligible. Additionally, a state must be considered a disaster area by the SBA or President. The SBA’s website states that “Small business owners in all U.S. states and territories are currently eligible to apply for a low-interest loan due to Coronavirus (COVID-19).” Those who are interested can apply here.
Additional SBA Products
The SBA offers a variety of financing options during this time to help support small business operations. Businesses can access capital through programs including 7(a), Express, Community Advantage, 504, and Microloan. The SBA also offers exporting assistance, which can assist small businesses that directly or indirectly export, but face challenges with COVID-19. These programs include Export Express, Export Working Capital, and Export Trade.
A 7(a) program is an all-inclusive option that provides loan amounts up to $5,000,000. Small businesses can use it for working capital, expansion, renovation, new construction, and more. An Express loan provides loans up to $350,000 for less than seven years. These are used for many of the same purposes as the 7(a) loan. A Community Advantage loan program allows lenders to help small businesses in underserved markets with a maximum loan size of $250,000.
The eligible uses for these loans are the same as the 7(a) program. A 504 loan program aims to facilitate economic development, job creation, and job retention. These loans are limited to the acquisition, or eligible refinance, of fixed assets. Finally, a Microloan program makes loans through nonprofit lending organizations to underserved markets. These are authorized to use for working capital, supplies, machinery, equipment, and fixtures. However, a borrower can not use it for real estate. The maximum loan amount is $50,000.
Deferring SBA Loans
On March 10, the SBA sent out a notice which stated that 7(a) Lenders, 504 program Certified Development Companies (CDCs), and Microloan Intermediaries should work with existing borrowers experiencing cash flow issues as a result of the current economy. As long as a 7(a) loan has not yet sold on the secondary market, a lender may grant the borrower a deferment for six months. If a loan sells on the secondary market, then the lender may grant a one-time unilateral deferment for up to 90 days without consent from the investor (investor may be notified after the fact). However, investors must give their consent before any future deferments on the same loan. A CDC may defer either six payments on a loan or 20% of the original loan amount (whichever is a lower amount).
No matter how small the amount, the SBA encourages at least some payment from the borrower during the deferment period. This shows that the payment source and method are the same, and also encourages the borrower to maintain a routine of consistent payment. With SBA loans, interest accumulates during the deferment period. Interest can be paid during deferment, in a lump sum at the end, or an increase in the loan after the deferment period.
Loan deferments are a temporary solution, so businesses should have a detailed plan and optimized payment strategy in place when requesting a deferral. SBA regulations require lenders to assess a borrower’s financial information under prudent lending standards case-by-case to determine if the borrower’s cash flow problems are short-term or permanent. SBA lenders may issue borrowers a deferral request form, which requires the borrower to outline the reason for their deferral. Additionally, it will ask borrowers to specify the steps taken to lessen cash flow issues, address any cash flow issues not resulting from COVID-19, and provide their most recent financial information.
COVID-19 has had quite an impact on the economy and has presented a variety of fiscal challenges for both businesses and individuals. However, assistance options continue to emerge from both the private and public sectors. As things continue to develop, it is critical to stay informed and utilize any programs that may be helpful.
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