The central bank of the United States, which is known as a federal reserve, is the most powerful economic institution in the United States and the entire world. The institution’s core responsibility is to fix the interest rates, managing the supply of money, and regulating the financial market. During the economic crisis, the Federal Reserve acts as a lender, this is a last resort for the government. It is one of the most politically independent institutions that are present in the United States. This institution is the heart of the country’s financial life and regulates wall street and overseas, the largest pool of assets.

The Federal Reserve is tasked to manage the U.S. monetary policy and regulate the bank holding companies and monitor the nation’s financial system. It has two mandates first to maintain stable prices and second, to achieve full employment. The fed reputation is so fierce that every economic institution around the world listens to every word of the policy.

The markets react instantly to the faintest clue regarding the interest policies. Every policy of fed is directed to maintain the stability of the prices and strengthen the currency of the U.S. The current Federal Reserve interest rate is at all-time low platform which is a good news for small businesses applying for a loan to phase through any economic downturn.

For many years, small business disaster loans have helped small businesses recover from various natural catastrophes like wildfire, earthquakes, hurricanes, etc. But it has never faced a pandemic like and so due to this pandemic, many small business owners and nonprofit organizations in all U.S. states can ask for an economic damage disaster loan. Based on the new eligibility cleared by the U.S. government, even the agricultural business can apply for the SBA loans disaster relief.

Eligibility

SBA disaster loan assistance is provided to small business owners and agriculture businesses qualified for a low-interest loan due to many hazardous outbreaks. The business has less than five hundred employees engaged, especially the agriculture business, which is eligible for the government’s new authority. The agriculture business includes the business that is engaged in food and fiber production, raising livestock, aquaculture, and other kinds of food-growing related businesses.

SBA has created a separate disaster loan with less stringent eligibility criteria and a smooth application process so that more funds are available. But the simplified process doesn’t assure that if the business has applied for the federal small business loan, it will get cleared. The greatest advantage of the simplified process is that the applicant will not get a specific reason for the denial of the loan. Since the criteria have been expanded, more applications are being poured in and getting to be processed.

There are many reasons why the banks will decline the SBA loan requests, one being the business being brand new. The primary criterion for applying the loan is that the business has to be a couple of years old; they don’t provide a loan to a startup or new company. The banks expect the executives of the company to be experienced in their industry. The company needs to be up and running and showing the financial activity of a minimum of twelve months.

The banks will run credit scores over the business even though it is not a criterion for issuing the disaster loan. For traditional SBA loans, the companies need to have high credit scores, but considering the current scenario, the high score criteria are not being implemented most rigorously.

During an economic downturn, banks become risk-averse and wish to protect them if the business owner cannot pay back loans; hence, they look for some kind of collateral assurance so that they can retrieve their money if the business is closed down. The collateral is split between the bank and SBA, and if the business is not able to collateralize a large amount of the loan, there will be a good chance the application will get rejected.

The most common way through which the SBA loans are rejected is because of incomplete submission of the documents. But since the process of applying for SBA loans has been simplified and done online. Hence, the chances of the loan being rejected due to incomplete submission of documents are highly improbable. But it still depends upon who the lender will be and the strength of the initial application. The lender might need additional documents to process the loan, and this is where the business can miss something, and the loan can be denied.

But the biggest point will be how the business will frame their story of how the ongoing pandemic or the natural catastrophes is affecting their business. The more convincingly the situation is explained, and factual information is shared, the more likely it is to approve the SBA loan.

How do federal small business loans work? 

The federal reserve provides direct loans to the small business directly affected by the any hazardous situation, which can be utilized to pay for fixed debts and payrolls—these loans are provided to small businesses at a very low-interest rate. But to provide assistance, SBA needs to receive a request from the governor of the state or territory. It’s a new process that has been implemented due to the current situation. Once the request is approved, the SBA can make the required loans available to the state or territory.

How is the current SBA loan terms differ from previous disaster loans?

Previously the Federal Reserve System, the majority of disaster loans, was made based on natural catastrophes like hurricane or earthquake. The loans were given to rebuild the business and replace the disaster-damaged property available to all businesses irrespective of their size. But now the loan is more for repairing the economic injury and available to only small businesses.

During a hurricane, SBA approved nearly half of the loan applications. Still, considering the current circumstances, it is expected that SBA will approve a larger volume of loans considering nationwide issue.