The enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) commences Phase III of the economic stimulus plan created to swiftly provide economic relief to our nation’s individuals and businesses in need during the COVID-19 crisis.
In addition to other programs established through the CARES Act to assist businesses with their immediate financial needs – programs like the Paycheck Protection Program (PPP) and the Employee Retention Credit – the Act also expands the Small Business Administration’s (SBA) program for Economic Injury Disaster Loans (EIDLs) to include certain small businesses affected by COVID-19. EIDLs are working capital loans in place to help these businesses meet their financial obligations through the disaster recovery period, January 31, 2020, to December 31, 2020.
Small businesses, small agricultural cooperatives (this excludes enterprises, such as farms), small businesses engaged in aquaculture, Employee Stock Ownership Plan (ESOP) owned businesses, most private, non-profit organizations, and individuals operating, with or without employees, as independent contractors are eligible to apply for EIDLs. The SBA standards apply for determining whether or not you are considered a “small business.” This generally includes businesses with fewer than 500 employees. Typically, affiliates under common control are also considered in the headcount in determining a business’s eligibility. To assess eligibility for businesses with more than 500 employees, check the SBA Size Standards found here.
Exclusions for eligibility include businesses with any principal, holding 50% or more in ownership interest, who is delinquent on child support obligations by more than 60 days, businesses with more than 75% of gross annual revenue derived from legal gambling activities, businesses with live performances of a a prurient sexual nature, businesses deriving, whether directly or indirectly, more than de minimis gross income from products, services, or depictions of a prurient sexual nature, businesses involved in lobbying, as well as entities that are part of state, local, or municipal government, and members of Congress.
To qualify, your business must not be engaged in any federally illegal operations, and must be in good standing with the SBA on any previous loans received through their administration. Unlike the loans offered through the PPP, general credit history will be taken into account for EIDLs, and the SBA does require a demonstrated ability to repay this type of loan. For loans over $25,000, collateral, generally real estate when available, or a pledge of collateral will be required. For loans over $200,000, the personal guarantee of certain business owners is required. The SBA will place a Uniform Commercial Code (UCC) lien against business assets; however, liens will not be placed against real estate owned by guarantors.
EIDLs are provided through the Small Business Administration. An application for an EIDL may be filled out immediately here. The SBA Customer Service Center may also be contacted at (800) 659-2955, or via email at firstname.lastname@example.org, for more information on their disaster assistance. After your application is submitted, the process for qualification may take 2-3 weeks. Upon approval, funding generally takes up to 5 days.
The SBA does, however, understand that time is of the essence for some businesses. During the application process, they are allowing businesses to request an advance of up to $10,000, which would be distributed to you within 3 days. And, if you receive an advance, even if you’re ultimately denied for the EIDL, this advance will NOT have to be repaid and will not be taxable on the condition that these funds went toward approved uses – things like payroll cost, mortgage or rent expense, and repayment obligations your business could not meet due to revenue losses experienced as a result of COVID-19.
Maximum Loan Amount
While your specific level of economic need will be determined by the SBA, your business may receive up to $2 million in assistance through an EIDL. One assistance loan is available per tax identification number. However, should you apply and qualify for an EIDL, and subsequently apply and qualify for a loan through the PPP, you will be able to refinance the EIDL loan with the PPP loan and remain in compliance with a single loan under your tax ID.
Approved Uses & Loan Terms
EIDLs are not approved for refinancing long-term debts. These funds are approved for payroll, accounts payable, fixed debts, and other bills your business is unable to pay as a result of COVID-19.
Unlike PPP loans, EIDLs are NOT forgiven; not in full, nor in part. The interest rate will be fixed for the life of the loan, with an interest rate of 3.75% for small businesses and 2.75% for non-profits. The SBA works with applicants to determine loan terms that suit your financial ability, and will set repayment terms over a period of up to 30 years. Your first loan payment is deferred for a 1-year period following loan origination. But, keep in mind, interest will accrue during the deferment period.
There is no obligation to accept an EIDL, even after you apply and receive notice that your business qualifies for the loan. Typical SBA loans allow for 60 days for you to accept the loan, and they have historically offered extensions of time to accept, when needed. Businesses are encouraged to apply for both PPP and EIDL assistance for this reason. Generally speaking, PPP assistance is desirable as it may be partially or fully forgiven, and the SBA will be issuing more guidance in the next week. As mentioned above, businesses already receiving SBA assistance that later qualify for a PPP loan may be able to refinance those loans with the PPP.
At ARB, we understand that businesses are struggling in this time of crisis. We want our clients, community, and friends to know we’re here to help. Don’t hesitate to contact us for additional information or with questions about EIDLs and other assistance programs available to you.
by Barton Haag, CPA