SBA Economic Injury Disaster Loans during the COVID-19 Pandemic
The federal government has authorized the Small Business Administration (“SBA”) to make Economic Injury Disaster Loans (“EIDLs”) and emergency advances to organizations whose operations have been adversely impacted by the COVID-19 pandemic and its significant effect to commerce. Below are some aspects of the EIDL program that small business owners may consider when determining whether to apply for an EIDL and related emergency advances:
- Who is eligible to apply for an EIDL? Applicants must be able to establish that the claimed economic injury is substantial and a direct result of the declared COVID-19 national emergency. Generally, EIDLs are available to small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private nonprofit organizations. Applicants who have not complied with the terms of previous SBA loans may not be eligible.
- Expanded eligibility under Section 1110 of the CARES Act. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) expands the applicant pool for EIDLs. In addition to the small businesses and nonprofit organizations noted above, also included as “eligible entities” under the CARES Act are: (i) businesses with not more than 500 employees; (ii) individuals who operate as sole proprietorships, with or without employees, or as independent contractors; (iii) cooperatives with not more than 500 employees; (iv) employee stock ownership plans with not more than 500 employees; and (v) tribal small business concerns with not more than 500 employees. The Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE”) amends the CARES Act to include as “eligible entities” agricultural enterprises with fewer than 500 employees.
- How are declared disaster areas determined? When the governor of a state determines that local resources are overwhelmed, that governor may request additional assistance from the federal government. The governors of Alaska, California, Oregon, and Washington have each issued declarations that make EIDLs available. A small business can determine if it is located within a declared disaster area by referencing the SBA’s Disaster Loan Assistance database. Under the CARES Act’s revisions to the Small Business Act, the SBA is further authorized to issue EIDLs in response to a national emergency involving federal primary responsibility as declared by the President under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5191(b)). On March 13, 2020, the President issued a proclamation declaring the COVID-19 outbreak a national emergency.
- How does the SBA determine when a small business has sustained substantial economic injury that would warrant disbursement of an EIDL? A small business may claim substantial economic injury if the business experiences a decrease in income from operations or a decrease in working capital resulting in the business being unable to meet its obligations and pay ordinary and necessary operating expenses.
- Covered period under the CARES Act. The “covered period” is defined under Section 1110(a)(1) of the CARES Act as the period beginning on January 31, 2020, and ending on December 31, 2020. A small business or private nonprofit organization seeking COVID-19 EIDL funds must have been operating as of January 31, 2020, in order to benefit from certain EIDL accommodations set forth under the CARES Act. For example, the SBA’s typical one year in business requirement is waived for COVID-19 related EIDLs, but such waiver is not applicable to businesses not in operation as of January 31, 2020.
- How can eligible small businesses apply for EIDLs issued by the SBA? Small businesses affected by the coronavirus pandemic may apply online or through the mail using SBA paper forms. The original funding allocated through the CARES Act for standard EIDLs and the emergency EIDL grant program was depleted by mid-April. On April 24, 2020, Congress authorized appropriations through the PPPHCE to provide an additional $50 billion to restart the issuance of loans made under the standard EIDL program and an additional $10 billion to fund more emergency EIDL grants. Applicants may refer to the EIDL website for the current status.
- What information must applicants provide to the SBA as part of the EIDL application process? Generally, the SBA requires EIDL applicants to submit (i) documentation that substantiates the ownership of the small business, (ii) copies of at least three of the small business’s most recently filed tax returns (or an explanation if not available), (iii) a schedule of liabilities listing all fixed debt carried by the small business, and (iv) personal financial statements of the small business and each principal owning 20% or more of the applicant small business. However, the CARES Act adjusts some of these requirements to help the SBA address the economic effects of the COVID-19 outbreak.
- SBA authority to rely on credit scores. Unlike with typical EIDLs, the CARES Act authorizes the SBA to approve applicants based solely on credit score and prohibits the SBA from requiring an applicant to submit a tax return or tax return transcript. The SBA is further authorized under the CARES Act to use alternative methods to determine an applicant’s ability to repay the EIDL.
- What are the common repayment terms associated with EIDLs? Federal law authorizes loan terms of up to 30 years, which may reduce the monthly payments associated with an EIDL. The maximum interest rate under the COVID-19 EIDL program is 4%. Federal law limits EIDLs to $2 million, but if a business is a major source of employment, the SBA is authorized to waive the $2 million loan limit. However, due to high demand for EIDLs, it has been reported by some outlets that SBA field offices are limiting the loan amount to $15,000. The SBA may require applicants to provide collateral for all EIDLs over $25,000; however, although the SBA will not decline a loan solely for lack of collateral, the SBA may require applicants to pledge collateral that is available.
- Additional waivers authorized by the CARES Act. In addition to the waiver of the one year in business requirement noted above, the CARES Act authorizes the SBA to (i) waive rules related to personal guarantees on advances and loans of not more than $200,000; and (ii) not require that applicants show an inability to obtain credit elsewhere prior to receiving a COVID-19 related EIDL.
- Emergency EIDL advances. During the covered period, which began on January 31, 2020, and ends December 31, 2020, applicants for EIDLs issued in response to COVID-19 may request that the SBA provide an advance that does not exceed $10,000 (as of April 10, 2020, SBA local field offices have announced that this amount would be limited to $1,000 per employee, up to $10,000). Under the CARES Act, the SBA is required to provide such an advance within three days after the SBA Administrator receives the application from the applicant. Applicants seeking the EIDL advance must certify, under penalty of perjury, that the applicant is an eligible entity. The SBA is still in the process of establishing procedures for issuing EIDL advances, and this may affect the maximum amount an applicant may receive through an EIDL advance.
- Limited use of advance funds. Advance funds must be used for purposes similar to those allowable under typical EIDLs, including (i) providing paid sick leave to employees unable to work due to the direct effect of COVID-19; (ii) maintaining payroll to retain employees during business interruptions or substantial slowdowns; (iii) meeting increased costs due to supply chain interruptions; (iv) making rent or mortgage payments; and (v) repaying obligations that cannot be met due to revenue losses.
- No repayment of EIDL advance funds. Even if an applicant’s EIDL is denied, the applicant will not be required to repay funds issued as an advance.
- Impact on forgiveness of PPP loans. If an applicant receives an EIDL advance and also receives a loan under the Paycheck Protection Program (“PPP”) authorized by the CARES Act and administered by the SBA, then the EIDL advance amount will be reduced from the loan forgiveness associated with the PPP loan.
- What is the deadline to apply for an EIDL? Completed EIDL applications must be submitted within nine months from the date of a governor’s disaster declaration. In California and Washington, the COVID-19 EIDL application deadline is December 16, 2020. In Oregon, the COVID-19 EIDL application deadline is December 21, 2020. The SBA may extend these deadlines. The CARES Act terminates the SBA’s authority to issue emergency EIDL advances on December 31, 2020.
- What alternative funding sources are available to small businesses through the SBA? Along with EIDLs, the SBA also offers the following programs:
- 7(a) program. Loans through private lenders for amounts up to $5 million. Recipients of loans issued under the 7(a) program may use the proceeds for working capital (similar to EIDLs), expansions or renovations, purchases of land and buildings, purchases of equipment and fixtures, refinancing of debt for compelling reasons, seasonal lines of credit, inventory, or to start a business.
- PPP loans. Loans through private lenders targeted at supporting businesses affected by COVID-19. Seventy-five percent of loan proceeds must be used for payroll related expenses, and, unlike other 7(a) program loans, PPP loans may be issued for up to $10 million.
- Express loans. Revolving loans with a principal up to $350,000 and for a loan term of no more than seven years. The SBA will approve or deny express loans within 36 hours of a completed application. Express loans may be used for the same purposes as 7(a) program loans.
- Export Express loans. Provides financing up to $500,000 prior to finalizing an export sale or while pursuing overseas business opportunities.