For businesses struggling to survive during the COVID-19 pandemic, there are two primary programs for obtaining emergency working capital: the Small Business Administration’s (SBA) Economic Injury Disaster Loan program (EIDL) which is discussed here, and the Paycheck Protection Program (“Paycheck Protection Loans”) created by the Coronavirus Aid, Relief, and Economic Stability Act (CARES Act), which is discussed in a separate article. (See The SBA’s Paycheck Protection Loan Program Through the CARES Act)
With the Availability of the Paycheck Protection Loans, Why Would a Business Need an EIDL?
This pre-existing loan program can provide an Eligible Organization with up to $2 million of additional working capital. The amount of funds received under a Paycheck Protection Loan is limited to the lesser of (i) 2.5 times average monthly payroll or (ii) $10 million dollars. If a business needs working capital beyond the amount received under the Paycheck Protection Loan, the EIDL can be a great option for additional cash. Here are some key points of the EIDL program:
- If a business receives a Paycheck Protection Loan, there are limitations on what the funds can be used to cover. However, an EIDL can be used to cover a much broader array of expenses such as accounts payable, principal payments on other loans, and any other fixed debt.
- An EIDL can have up to a 30-year term, whereas the Paycheck Protection Loans must be paid within 10 years.
- While EIDLs are not forgivable like the Paycheck Protection Loans, they are a low-interest way to obtain working capital beyond the amount provided in a Paycheck Protection Loan.
- In addition to the EIDL, the SBA is offering an immediate $10,000 advance as emergency funding for businesses, which is discussed in more detail below.
Who is Eligible for an EIDL?
The CARES Act expanded eligibility for borrowers applying for an EIDL. These loans are now available to the following “Eligible Organizations”:
- Businesses or cooperatives with fewer than 500 employees,
- Sole proprietors or independent contractors,
- Certain non-profit organizations, and
- Employee Stock Ownership Plans (ESOPs) with fewer than 500 employees.
To qualify, an Eligible Organization must have suffered substantial economic injury caused by the COVID-19 pandemic. “Substantial economic injury” means the business or non-profit is unable to meet its obligations and pay its ordinary and necessary operating expenses. More specifically, businesses and non-profits are eligible for the EIDLs if they
- Are directly affected by the disaster,
- Offer services to the businesses directly affected by the disaster, or
- Are indirectly related to the industries that are likely to be affected by the disaster.
These loans are not intended to replace lost sales or revenue.
There are certain types of organizations that are not eligible for an EIDL. Broad categories such as agricultural enterprises, charitable and religious organizations, and gambling enterprises may be excluded from eligibility. However, there are numerous factors to be considered when determining if your organization is eligible for an EID Loan. .
What is the Criteria for Getting Approved?
There is no minimum credit history required; instead, the SBA will assess the Eligible Organization’s ability to repay the loan on a case-by-case basis.
The SBA is empowered to approve applicants for EIDLs solely on the basis of their credit score or “alternative appropriate methods to determine an applicant’s ability to repay.”
Eligible Organizations need to have been operational on or before January 31, 2020.
What are the Terms and Conditions of an EIDL?
EIDL may be in an amount up to $2 million, but the actual loan amount provided will be based on the amount of economic injury and other specifics of the business such as the size of the organization and its current financial resources.
The interest rates are 3.75% for businesses and 2.75% for non-profit organizations.
The term of these loans will not exceed 30 years and repayment terms will be determined based on each Eligible Organization’s ability to repay.
There are no penalties for early pre-payment of the loan.
Further, a borrower does not need to provide a personal guarantee for loans under $200,000.
EIDLs are not subject to forgiveness.
What are the Collateral Requirements?
The SBA requires collateral for all loans over $25,000. Real estate, equipment, machinery and other assets may be used as collateral.
What is the $10,000 Grant Program?
The CARES Act permits an Eligible Organizations seeking an immediate influx of cash to request a $10,000 emergency advance. Once requested, the organization should receive the funds within three days of the SBA receiving the EIDL application, .
Emergency EIDL grants are first-come, first-served, and not allowed after December 31, 2020.
If the EIDL application is denied, the applicant is not required to repay the $10,000 advance.
This emergency advance can be used only for payroll costs, paying sick leave due to COVID-19, increased material costs, rent or mortgage payments, or for repaying obligations that cannot be met due to revenue losses.
If an applicant received an advance as part of the EIDL process and ultimately is approved for a PPP loan, the advanced amount will be reduced from any other loan forgiveness amount for payroll costs.
How to Apply for an EIDL and Loan Advance:
A business applies for an EIDL directly with the SBA. Applications are available now at https://covid19relief.sba.gov/#/.
There is no cost to apply and no obligation to take the loan if offered.