When the Coronavirus Aid, Relief, and Economic Security (CARES) Act (the Act), became law on March 27, 2020, it brought with it large-scale programs aimed at bolstering small businesses across the nation. A significant portion of the Act included the Paycheck Protection Program, which is a program to help small businesses with fewer than 500 employees get the assistance they need to fund payroll, cover mortgage and lease payments, and pay utilities. Additional information about the Paycheck Protection Program (PPP) can be found on our COVID-19 Financial Update resource page.
Just as significant as the PPP is another component of the CARES Act: the Small Business Administration’s (SBA) Emergency Economic Injury Disaster Relief Loan (EIDL) program. While the EIDL program has long been a part of the SBA’s lending platform and has helped countless businesses through other natural and economic disasters, with the nation facing the coronavirus pandemic, the SBA has injected new life into this program by expanding eligibility requirements to make this program even more accessible in the face of difficulty. Under the CARES Act, emergency EIDLs are available during the covered period, which means loans originated between January 31, 2020 and December 31, 2020.
EIDLs are unique in that they are administered by the SBA, but the funds come directly from the U.S. Treasury. There’s no cost to apply for the loans, and the maximum loan is $2 million. Loans of $25,000 can be obtained with no collateral at all. Even if a business has an open EIDL, they can apply for a new one due to the coronavirus pandemic.
Small business of fewer than 500 employees throughout the supply chain (manufacturers, wholesalers, and retailers, for example) that have been directly impacted by the pandemic, offer services directly related to businesses in the affected area, or are indirectly related to businesses harmed by the pandemic may apply. Most private not-for-profit organizations are also eligible. Additional criteria include:
- The small business must have a physical presence in the disaster area. The SBA defines physical presence as tangible and significant. P.O. boxes do not meet this threshold.
- The applicant must not have credit elsewhere, and
- The size requirements, exclusive of affiliates, must be met.
Criteria for Approval
During the covered period, the SBA is offering EIDLs based solely on the applicant’s credit score, demonstrating an ability to repay the loan, and satisfying the eligibility requirements above. For help determining your credit score, visit one of several credit reporting sites including FreeCreditReport.com or Identity Secure. While these services are not necessarily free, they will provide up-to-date information about personal credit reporting, including scores from the three major credit bureaus.
Borrowing: How Much and For What?
EIDLs are available for small businesses in an amount up to $2 million. Generally, the loans carry an interest rate of 3.75%; private NFP organizations get a break on the rate at 2.75%. The loans may be repaid over a period not to exceed 30 years. Like all loans, the amount ultimately funded and the repayment term are based on applicant’s creditworthiness. Loans up to $25,000 do not require any collateral. When collateral is required, real estate is obligated first. The SBA has committed to not declining loans for a lack of collateral; they will work with borrowers on what assets are available. After a borrower’s application has been submitted, an applicant can request an emergency grant not to exceed $10,000 that will be funded by the SBA within 72 hours.
The loans may be used for a wide array of obligations like fixed debts (rent, mortgage, and leases), funding payroll, satisfying accounts payable, or meeting other obligations that could have been paid if not for the disaster.
EIDLs have a few stipulations about how the funds can be spent. The funds are not intended to replace lost revenue or to support business expansion. Emergency loaned funds can not be spent on dividends to stakeholders or bonuses for employees or management. Disbursements to owners (except for services specifically performed) are prohibited, as are repayments to stakeholders and principals on outstanding loans unless the loans were to infuse funds into the company specifically for disaster response. Funds may also not be used for acquisition of fixed assets, expansion of facilities, relocation, or refinancing long-term debt. Also explicitly excluded from the use of funds is taking EIDL funds to pay down or pay off loans provided or owned by another federal agency, including the SBA. That restriction extends even to regular installment payments. The only exception noted is that EIDL funds may be used to settle outstanding IRS obligations. Do a deeper dive on the restrictions of funds by visiting the SBA Disaster Assistance Program SOP 50 30 9.
Best Practices Before You Apply
The SBA has provided several helpful hints and best practices to consider before you apply electronically. First and foremost, an ounce of prevention is worth a pound of cure.
- Take time to print paper copies of the application and all the supporting forms to gather the needed documentation and loan details in advance. Links to all the necessary documentation are presented below in the “Let’s Get Started” section.
- It is essential that borrowers have a complete application the first time around. The SBA will send a notification if a package is incomplete, but the critical part is that an incomplete application pushes an applicant to the back of the line.
- It’s possible to adjust the loan amount up or down during the process and even up until the time of funding, in the case of a decrease. If the loan is denied, there is a six-month window during which new information can be submitted along with a request for reconsideration.
- Do not ignore the “credit elsewhere” statement.
- Losses of six months or less may be eligible for expedited loan processing. Make sure the amount of the loan is clearly articulated in the application as an additional note in the comments section.
- For additional help in the application process, don’t forget resources like the Metropolitan Dallas Small Business Development Center, the North Texas Small Business Development Center, and SCORE Dallas; all three organizations are in partnership with the SBA to provide mentors and counselors to applicants seeking help as part of this program.
Let’s Get Started
Again, remember that the fastest and most accurate way to apply is online directly with the SBA. When the time comes, begin that process here; but beforehand, download the necessary application and supporting paperwork in advance to ensure everything is ready for a successful first application.
- SBA Form 5, U.S. Small Business Administration Disaster Business Loan Application
- SBA Form 159D, Fee Disclosure and Compensation Agreement
- SBA Form 1368, U.S. Small Business Administration Additional Filing Requirements Economic Injury Disaster Loan (EIDL), and Military Reservist Economic Injury Disaster Loan (MREIDL)
- SBA Form 413D, U.S. Small Business Administration Personal Financial Statement Disaster Programs
- IRS Form 4506-T, Request for Transcript of Tax Return
- SBA Form 2202, Schedule of Liabilities
To submit a paper application and support instead of applying online, mail the complete package to:
U.S. Small Business Administration
Processing and Disbursement Center
14925 Kingsport Rd.
Fort Worth, TX 76155
The SBA Customer Service Center can be reached at 800.659.2955 or firstname.lastname@example.org.
Our LGT advisors stand ready to help you through this difficult time. Every company faces this disaster in a different way, and these lending options have different tax consequences. Please reach out to us about your specific situation before proceeding with your applications and also for assistance with the application process. Stay informed about future developments by frequently visiting our COVID-19 Financial Updates page.