What is Employee Retention Credit?
Employee Retention Credit (ERC) is a refundable federal payroll tax credit established under the CARES Act that allowed eligible small businesses to claim a percentage of qualified wages paid to employees during periods of COVID-19-related economic disruption. According to the IRS, eligible businesses could claim up to USD 26,000 per employee across the 2020 and 2021 tax years combined.
How Employee Retention Credit Works in Business Lending
The Employee Retention Credit functions as a refundable tax credit rather than a traditional loan, meaning businesses receive actual cash refunds — not borrowed funds — when their ERC claim exceeds payroll tax liability. For the 2020 tax year, the credit equaled 50% of qualified wages up to USD 10,000 per employee annually. For 2021, that rate increased to 70% of qualified wages up to USD 10,000 per employee per quarter. Eligibility required either a full or partial suspension of operations due to a government order, or a significant decline in gross receipts — specifically a drop of more than 50% compared to the same quarter in 2019 for 2020 claims, and more than 20% for 2021 claims. The IRS has been processing ERC refund claims, though a moratorium on new claims was placed in September 2023 amid widespread fraud concerns, and the agency has since introduced a Voluntary Disclosure Program for businesses to repay improper claims.
From a lending perspective, an approved and pending ERC refund can directly influence a business’s financing options. Community banks and SBA lenders may factor confirmed ERC receivables into cash flow analysis when underwriting a term loan or SBA 7(a) loan application. Some online lenders and specialty finance companies began offering ERC advance products — essentially short-term loans against anticipated refund amounts — charging fees that sometimes translated to APRs exceeding 40%. CDFIs and credit unions have generally been more cautious, advising borrowers to await the actual refund before using it as collateral. It is critical that business owners work with a licensed CPA or tax attorney before claiming the ERC, as improper filings can trigger audits, repayment demands, and penalties that negatively impact creditworthiness.
What Business Owners Should Do About Employee Retention Credit
If you have not yet filed an ERC claim and believe you may qualify, begin by gathering quarterly payroll records, gross receipts documentation by quarter, and any government orders that impacted your business operations between March 2020 and September 2021. Engage a reputable tax professional — not a third-party “ERC mill” — to evaluate eligibility before filing amended payroll tax returns using IRS Form 941-X. Per the Federal Reserve’s 2023 Small Business Credit Survey, cash flow constraints remain the top financial challenge for small businesses, and a legitimate ERC refund can meaningfully shore up working capital. If you have already filed and are awaiting a refund, document the pending claim formally, as some lenders will recognize it as a liquid asset during underwriting. Avoid ERC advance lenders offering unusually high fees, and review IRS notices carefully if you receive correspondence requesting additional information or repayment.
Whether your ERC refund is pending, approved, or already received, your overall financial profile — including how that capital was deployed — matters when applying for a small business loan. We connect you with lenders — we do not lend — which means our role is to match your specific financial situation, including any ERC history, with SBA lenders, community banks, CDFIs, and online lenders best positioned to serve you. Our network understands how pandemic-era credits affect business financials, and we help ensure lenders see the full, accurate picture of your business health.
What Employee Retention Credit do lenders require for a business loan?
Lenders do not require an ERC to approve a business loan, but a documented ERC receivable can strengthen your application. SBA 7(a) lenders and community banks may count a confirmed, pending IRS refund as a liquid asset in your balance sheet analysis. Online lenders evaluate ERC history on a case-by-case basis, primarily looking at how the resulting cash flow improved business stability.
How does Employee Retention Credit affect my interest rate?
Receiving and properly deploying an ERC refund can improve your debt-service coverage ratio (DSCR), which is a key metric lenders use to price risk — SBA lenders typically require a DSCR of at least 1.25, and stronger ratios can reduce your offered interest rate by 1 to 3 percentage points. A business that used ERC funds to reduce debt or build cash reserves will generally appear less risky to underwriters. The FDIC data shows that borrowers with stronger liquidity positions consistently receive more favorable loan terms from community banks and credit unions.
Can I get a business loan with poor Employee Retention Credit history?
Yes — an ERC issue, such as a disallowed claim or repayment obligation, does not automatically disqualify you from a business loan, but it must be disclosed and explained to lenders. If your financials have been weakened by an improper ERC repayment, CDFIs and SBA Microloan program lenders are often more flexible and mission-driven in their underwriting. Secured loan options, including equipment financing or SBA 504 loans backed by fixed assets, can also provide a viable path forward regardless of ERC complications.
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Sources: SBA.gov, Federal Reserve 2023 Small Business Credit Survey, CFPB, FDIC. Small Business Loans Today is an independent affiliate publisher — not a lender or broker.