The Economic Injury Disaster Loan Program: Immediate Assistance for Small Businesses

Immediate Assistance for Small Businesses

The Small Business Administration's Economic Injury Disaster Loan (EIDL) Program is intended to aid eligible small businesses and non-profit organizations affected by COVID-19 by offering fixed-interest rate repayable loans for working capital purposes, plus an immediate $10,000 grant that need not be repaid. The goal is to get money into the hands of distressed businesses as soon as possible.

The recently-enacted Coronavirus Aid, Relief, and Economic Security (or “CARES”) Act expands the SBA's existing EIDL program by relaxing the eligibility requirements (previously, EIDL loans were restricted to respond to physical disaster events like hurricanes, etc.). A business may apply for an EIDL loan of up to $2 million. Except for the $10,000

emergency grant, EIDL loans are not forgivable in contrast to Paycheck Protection Program (PPP) loans, which are.

WHAT CAN EIDL LOANS BE USED FOR?

Similar to PPP loans, EIDLs may be used for: payroll; fixed debts (mortgage, rent, etc.); accounts payable; sick leave to employees unable to work due to direct effect of COVID-19; meeting increased costs to obtain materials unavailable because of supply chain issues; and repaying certain obligations that cannot be met due to revenue losses.

Eligible EIDL borrowers include: small businesses with 500 or fewer employees; private non- profit organizations; small agricultural cooperatives; sole proprietorships, with or without employees and independent contractors; and tribal businesses, cooperatives, and employee stock ownership plans with no more than 500 employees. Any business applying for an EIDL loan must have been in business as of January 31, 2020, and certify that it has suffered a substantial economic injury due to COVID- 19.

LOANS ARE NON-RECOURSE; NO NEED TO ESTABLISH CREDITWORTHINESS.

The CARES Act modifies the EIDL program by waiving the personal guarantee requirement for loans less than $200,000. Applicants need not prove they have been in operation for a year before COVID-19 nor do they have to establish they cannot obtain credit elsewhere.

EIDLs are offered to small businesses with an interest rate of 3.75%, and 2.75% for nonprofit organizations. Payments may be deferred for up to one year. Businesses may also be eligible to receive $500,000 in loan proceeds for the first six-month term. However, repayment terms are ultimately determined on a case- by-case basis, and some, but not all, businesses can expect to repay an EIDL over thirty years.

WHAT ARE $10,000 EMERGENCY EIDL GRANTS?

The CARES Act also expands the reach of EIDLs by appropriating $10 billion for EIDL grants. EIDL grants are $10,000 cash advances for businesses that apply for an EIDL loan, which shall be paid by the SBA within three days of application. A business may use this advance for the same purposes as EIDL loans. However, a business is not required to repay the EIDL grant, even if the business's application for an EIDL loan is ultimately denied. EIDL grants are available from January 31, 2020 to December 31, 2020.

KEY CONSIDERATION: AVOID DUPLICATION OF EIDL AND PPP LOAN PROCEEDS.

One of the key considerations when assessing the EDIL and the PPP is that there is no duplication of the loans. During Hurricane Sandy, many homeowners obtained SBA loans only to later find out they were ineligible for grant money. The CARES Act calls for a similar interplay—borrowers that receive an EIDL for COVID-19 reasons cannot also receive a PPP for the same purpose. So, borrowers can get loans under both programs, but the proceeds must be used for different purposes. Note: borrowers may refinance their EIDL into a PPP assuming they meet eligibility requirements. If a borrower received an EIDL grant and is later approved for a PPP, any amount advanced under the EIDL grant program will be subtracted from the total amount forgiven under PPP.