Emergency Lines of Credit: What Businesses Should Know
In emergency situations, it’s important to have an emergency business plan checklist when faced with unforeseen circumstances. One of the most important elements of emergency readiness is financial—small businesses especially need to be able to secure funding in the midst of turbulent times.
This guide details everything you need to know about establishing a line of credit in the wake of an emergency, or in preparation of one.
Given the current emergency with the COVID-19 pandemic, after establishing basic credit lines generally available to small businesses, we’ll focus on emergency lines of credit available right now.
Then, we’ll delve into broader and alternative considerations.
The Small Business Association
The U.S. Small Business Association, also known as the SBA, is the federal agency dedicated to supporting and advocating for small businesses and entrepreneurs across the nation. While the SBA does not directly loan money to businesses, it:
- Connects small businesses to lenders
- Helps lenders access funds to lend
- Regulates and guarantees standards for loans
- Keeps rates competitive despite guarantees
- Reduces risks for lenders with standards for eligibility
While SBA is not the only source of credit for small businesses, it is a uniquely safe and trustworthy source for both lenders and borrowers.
SBA Emergency Funding
Among the kinds of loans available from the SBA, various low-interest Disaster Assistance loans are designed to assist businesses who require funding beyond what insurance and funding from the Federal Emergency Management Agency (FEMA) can provide.
Conditions Under COVID-19
Emergency credit, and all emergency funds, are there for when you need them most.
At the moment, the entire country, and much of the world, is facing unprecedented circumstances. As the COVID-19 pandemic spreads, countless people’s lives, and businesses, are being impacted. As thousands face illness, hospitalization, and casualties, millions face unemployment, and everyone faces the psychological toll of these realities, along with conditions like social distancing and shelter-in-place, this has not been an easy time for anyone.
This has all presented unique challenges for all businesses, especially small and local businesses.
SBA’s COVID-19 Relief Efforts
Learning how to navigate business during COVID-19 can be difficult, so the SBA has expanded its typical emergency funding options.
There are 4 main sources of emergency funding to consider from the SBA:
Now, let’s walk through each one.
Paycheck Protection Program
The Paycheck Protection Program (PPP) exists in order to complement a business’s ability to keep workers employed. To that end, it provides forgiveness for loans that are used directly for payroll purposes.
Important specifications of the PPP include but are not limited to:
- Small businesses meeting SBA size standards are eligible.
- Forgiveness is contingent on employers retaining, or quickly rehiring workers, at consistent salary levels.
- Funds must be used on payroll (~75%) and associated costs.
- Payments are deferred 6 months.
- Businesses can borrow up to a maximum of $10 million.
- The loan’s maturity rate is 2 years; interest is 1%
Especially in light of wide-scale furloughs and layoffs, the PPP is a massive benefit to both businesses and the workers that keep them operational.
Economic Injury Disaster Loan Emergency Advance
The Economic Injury Disaster Loan, also known as the EIDL, in a direct response to the COVID-19 crisis, enables small businesses to apply for up to a $10,000 advance that does not have to be repaid.
As with PPP, small businesses must meet SBA size standards. Upon approval, funds will be available within days.
The EIDL also works in conjunction with...
Express Bridge Loans
The SBA’s Express Bridge Loan Pilot Program is available to businesses that already have a relationship with an SBA lender. These businesses can apply for a loan of up to $25,000.
A major feature of these loans is their fast turnaround. They are intended for businesses in need of quick access to funds. For instance, they can help cover the gap while a business awaits approval from other sources of funding.
Importantly, the loan can be repaid in full or in part with EIDL funds.
This is not a loan itself, but a credit benefit applied to new and existing loans:
- For all new and current 7(a), 504, and microloans: Any such loans issued before September 27, 2020, will have all principal, all interest, and all fees automatically paid for a six-month period.
- For all Serviced Disaster loans: Any such loans in “regular servicing” status on March 1, 2020 are deferred through December 31, 2020.
Alternative Emergency Funding Options
In addition to the SBA offerings outlined above, there are other sources of emergency credit and overall funding to consider. Some of the major categories include:
- Smaller governmental programs
- Private investment
State and Local Governmental Assistance
Another funding option you might consider, beyond federal programs, is state- and local-level public programs. While these are changing rapidly as the situation develops, you should continually seek out information about what kinds of relief are available, or become available, in your state.
Finally, you might consider seeking out private sources of credit, or funding, in this or any emergency. In any case, there are certain benefits to non-SBA funding, including increased flexibility to allocate your funds however you need or choose to.
Some examples you might consider on this front include but are not limited to:
- Banks, credit unions
- Nonprofits and other Non Government Organizations (NGOs)
- Investors and funds, including:
- Non-SBA banks and credit unions
- Venture capital
- Hedge funds
- Private equity
- Angel Investors
- And, finally... donations
Another great option for emergency funds doesn’t involve credit, but charity.
Crowdfunding is a form of crowdsourcing, or drawing upon the contributions of a large mass of individuals in order to achieve a goal. When crowdsourcing ideas for a project with a “suggestions” box, everyone’s figurative “two cents” can go a long way.
When crowdfunding, everyone’s literal two cents can help get you back on your feet.
The great promise of the internet was always connectivity and communication: it connects people from all around the world and enables them to communicate with each other. One of the most amazing developments of that constantly evolving communication has been the emergence of community and support.
One way people in online communities support each other is through crowdfunding, or opening up channels of donation and giving, often leveraging smaller donations across large populations.
But crowdfunding doesn’t need to happen online.
Before there even were online platforms for things like crowdfunding, there was neighborly care.
When a member of a tight-knit community suffered a medical tragedy, members of the community often come together and helped their neighbor out. From a collection jar on the counter of the neighborhood pizza shop to a fundraiser at a local school, people find ways to support those closest to them.
That’s true for businesses, too.
When a beloved local pub is facing economic hardship, its loyal patrons may buy a few extra rounds to help out the owner, then tip extra generously to support the waitstaff. That’s because people believe—they know—that local businesses contribute to their quality of life.
Your neighborhood itself can be a vital resource, financially and otherwise, in times of need.
How Nextdoor Can Help
The people closest to you, in your community, are tacit allies who you can count on in times of need. Neighbors, and neighborhoods, are extremely powerful networks of people directly connected to one another by geographical location.
Nextdoor is your neighborhood hub, the place your neighborhood lives online.
On Nextdoor businesses can:
- Interact with loyal clients and building customer relationships
- Reach out to new clientele
- Promote new or special services
- Recommend and synergize with other local businesses
- Offer services (including discounted or pro bono) to those in need
- Request support (patronage or funds)
By connecting you with the people in your community, Nextdoor creates infrastructure for communication and support. Locals that love your business can recommend it to others, opening up new sources of revenue. And people in your community can even organize donations or other campaigns to help you meet your financial needs.
You’ve already done the hard work of establishing a local business that’s a key part of your community. Nextdoor can help you realize your neighborhood’s true potential for supporting you in the short term, so you can keep on supporting them in the long term.
Secure the Funds You Need to Provide For Your Community
If you find yourself in a position that requires emergency credit, we sincerely hope you’re able to find the funding you need. We also hope that this guide proves useful as you navigate the upcoming months.
If you are a local business, claim your free Business Page to get started on Nextdoor. Resources on how to use Nextdoor to stay connected with your local customers during coronavirus, pertinent news affecting businesses, and more, are available in our Small Business Guide for Coronavirus Relief.