COVID-19 and the SBA Economic Injury Disaster Loan Program

March 24, 2020

Businesses that have been impacted by the COVID-19 pandemic may be eligible for an Economic Injury Disaster Loan (EIDL) from the United States Small Business Administration (SBA). The SBA is offering low-interest federal disaster loans for working capital to small businesses suffering substantial economic injury as a result of the COVID-19 pandemic. The SBA was authorized to issue such loans by the Coronavirus Preparedness and Response Supplemental Appropriations Act signed by President Trump on March 6, 2020. The EIDL program is intended to provide vital economic support to small businesses needed to overcome temporary losses in revenue arising from the COVID-19 pandemic.

What Businesses are Eligible for EIDLs?

  • Located in a Declared Disaster Area. The business must be located in a declared disaster area, which now includes all U.S. states and territories.
  • Small Business or Non-Profit. The business must be a small business, small agricultural cooperatives, small aquaculture businesses, and most private non-profit organizations, and not deemed to be in an industry deemed ineligible by the SBA.
    • The SBA measures small businesses on the basis of published size standards, which are usually stated in number of employees or average annual receipts. The definition of “small” varies by industry.
    • The SBA website includes a size standards tool to assist businesses in determining whether they qualify as a “small” business.
    • In determining whether a business is a small business, consideration should be given to how to treat subsidiaries and affiliates of the business, which requires legal analysis in some cases.
    • Ineligible businesses include:
      • Agricultural Enterprises (if the primary activity of the business (including its affiliates) is as defined in Section 18(b)(1) of the Small Business Act, neither the business nor its affiliates are eligible for EIDL assistance).
      • Religious Organizations.
      • Charitable Organizations, businesses considered hobbies, government-owned concerns.
      • Gambling Concerns (Ex: Concerns that derive more than 1/3 of their annual gross revenue from legal gambling activities).
      • Casinos & Racetracks (Ex: Businesses whose purpose for being is gambling (e.g., casinos, racetracks, poker parlors, etc.) are not eligible for EIDL assistance regardless of the 1/3 criteria noted above.
      • Real estate developers-establishments primarily engaged in subdividing real property into lots and developing it for resale on their own account.
  • Substantial Economic Injury due to COVID-19 Pandemic. The business must have suffered substantial economic injury due to the COVID-19 pandemic, such that the business is unable to meet its obligations as they mature or to pay its ordinary and necessary operating expenses.
    • Such businesses would include those directly affected by the disaster, businesses that offer services directly related to the businesses in the declaration; and other businesses indirectly related to the industry that are likely to be harmed by losses in their community (for example, a manufacturer of goods may be eligible as well as the wholesaler and retailer of those goods).
    • Loss of anticipated profits or a drop in sales is not considered substantial economic injury for this purpose.
  • Acceptable Credit History. Applicants must have a credit history acceptable to the SBA.
  • Ability to Repay. The SBA must determine that the applicant business has the ability to repay the EIDL. Businesses with a prior history of inability to make loan payments or losses in prior years may be deemed ineligible.
  • Unable to Obtain Credit Elsewhere. This business concern and its affiliates and principal owners (20% or more ownership interest) must have used all reasonably available funds and be unable to obtain credit elsewhere.
    • Credit elsewhere” means that, with the applicant’s cash flow and disposable assets, SBA believes the applicant could obtain financing from non-federal sources on reasonable terms.
    • This is a ‘loan of last resort.’ If the applicant (or its owners or affiliates) have access to personal funds or a personal line of credit, the SBA expects the applicant to exhaust those before accessing EIDL funds. The applicant can apply if it has other loans, including other SBA Loans (even other disaster loans), but EIDLs cannot be consolidated with other disaster loans.

Key Features of the EIDL Program

While the exact terms of the EIDLs are determined on a case-by-case basis, the following are the key features:

  • Amount: Up to $2,000,000 in principal.
  • Permitted Uses:
    • EIDLs may be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred. The loans are not intended to replace lost sales or profits or for expansion.
    • Loan proceeds cannot be used to:
      • Refinance indebtedness which the applicant incurred prior to the disaster event.
      • Make payments on loans owned by another federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act.
      • Pay, directly or indirectly, any obligations resulting from a federal, state or local tax penalty as a result of negligence or fraud, or any non-tax criminal fine, civil fine, or penalty for non-compliance with a law, regulation, or order of a federal, state, regional, or local agency or similar matter.
      • Repair physical damage.
      • Pay dividends or other disbursements to owners, partners, officers or stockholders, except for reasonable remuneration directly related to their performance of services for the business.
  • Collateral:
    • EIDLs over $25,000 require collateral to the extent it is available.
    • The SBA is looking for collateral in the business/applicant's name.
    • The SBA takes real estate as collateral when it is available.
    • The SBA will not decline a loan if the applicant lacks collateral if it is reasonably sure that the applicant can repay the loan. If the applicant refuses to pledge available collateral when requested by SBA, however, SBA may decline or cancel the loan.
    • The SBA is willing to take a second or third lien position.
  • Interest Rates: EIDLs have a per annum rate of 3.75% (or 2.75% for non-profit organizations).
  • Term: EIDLs are payable over a term of up to 30 years. The actual term is determined by the SBA based on the applicant’s ability to repay.
  • Repayment: EIDLs are now eligible for 12-month deferment.
  • Fees: There are no upfront fees or early payment penalties charged by SBA.

EIDL Application Process

Applicants are encouraged to submit their applications electronically through the SBA’s website. Among the information that will be needed are the following:

  • A completed loan application. Note that section 3 of the electronic application includes a large comment area in which applicants should summarize their economic damage and detail how the applicant arrived at that figure.
  • Tax Information Authorization (IRS Form 4506T) for the applicant, principals and affiliates.
  • Complete copies of the most recent Federal Income Tax Returns of the applicant (or an explanation of why none can be provided).
  • Schedule of Liabilities (SBA Form 2202).
  • Personal Financial Statement (SBA Form 413).

There is no cost to apply for an EIDL, nor is there an obligation to take the loan if it is offered. If the loan request is denied, the applicant has six months to provide new information and submit a written request for reconsideration.

Other Programs

There are other programs available to businesses impacted by the COVID-19 pandemic, including the SBA’s 7(a) loan program, which offers loans by third party lenders to eligible businesses within the U.S. and its territories.

Proposed Legislation

As is being widely reported in the media, the U.S. House of Representatives and the U.S. Senate continue to negotiate several bills that would impact the EIDL Program and other federal programs, including the SBA 7(a) loan program. Among the proposals included in Senate Bill 3548, the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act” sponsored by Senator Mitch McConnell and other senators and introduced on March 19, 2020, includes proposals to expand the SBA 7(a) loan program to address growing needs of certain business, to be funded with $300 billion of new appropriations. Subject to certain reductions and limits, the CARES Act would make a portion of an SBA 7(a) loan equal to certain costs of maintaining payroll eligible for forgiveness.

The U.S. Congress is also considering appropriating funds for Small Business Interruption Loans (SBILs), which would be used to mitigate the impact of the COVID-19 pandemic on employment by funding payroll for a period of time, subject to limitations (including dollar caps) and restrictions.

Lewis Rice will continue to monitor these legislative developments and their impact on programs available to business impacted by the COVID-19 pandemic.

Conclusion

Before applying for an EIDL, a business should consider whether it needs consent from third parties to obtain the EIDL or to secure the EIDL with collateral, such as its other lenders under the terms of its loan documents, landlords under the terms of any leases, and owners under the terms of any organizational documents (including, without limitation, shareholder agreements).

Additional information on the EIDL Program is available at the SBA disaster assistance customer service center, or by calling the SBA at 1-800-659-2955 (TTY: 1-800-877-8339), or by e-mailing the SBA at [email protected].

Interested businesses can also contact their local Small Business Development Center (SBDC) for guidance. While an SBDC cannot tell an applicant if its loan will be approved, it can provide guidance for the application process. SBDCs can also help businesses develop a survival or disaster response plan. Interested businesses can use the SBA’s Local Assistance Directory to locate the nearest SBDC office.

While this is a constantly changing situation and Congress continues to debate legislative responses to the COVID-19 pandemic, it is clear that it is a Congressional priority to provide financial assistance to businesses (and particularly small businesses) that have been adversely impacted by the COVID-19 pandemic. It remains to be seen how that assistance will impact the EDIL program, the 7(a) loan program, and other existing or to-be-created programs, including as to eligibility criteria, terms, deferments, forgiveness, and the like. Lewis Rice will continue to monitor these developments and provide updates as needed.

If you have any questions about the federal government programs available or the implications and disruptions of COVID-19 on your business, please contact one of the authors above or another member of COVID-19 Task Force.

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