Is a COVID-19 Economic Injury Disaster Loan Right for You?

More than a year after the COVID-19 pandemic began, small businesses and nonprofit organizations across the country still seek financial assistance to deal with the pandemic’s economic ripple effects. When Paycheck Protection Program (PPP) funds run out, what should you do? One option might be the pandemic-modified Economic Injury Disaster Loan (EIDL) program, now known as the COVID-19 EIDL. Before you decide to apply, read the fine print.

EIDL program basics

Throughout its history, the SBA’s EIDL program has provided funds to organizations during federally declared disasters. The basic terms included up to $2 million dollars in loans issued directly by the SBA for a term up to 30 years at an interest rate not to exceed 4%. The COVID-19 national emergency increased the popularity of EIDL as a second vehicle — alongside the PPP — to create access to needed capital. (Learn more about cross-program eligibility on all SBA COVID relief programs here.)

The new COVID-19 EIDL

Because the pandemic crisis didn’t directly align with the EIDL program structure, the CARES Act and subsequent legislation carved out a separate EIDL program, the COVID-19 EIDL, waiving the following requirements of the original EIDL:

• Personal guarantees of EIDLs up to $200,000.
• Borrowers being required to be in business for at least a year (the CARES Act does, however, require that borrowers be in operation on January 31, 2020).

Additionally, for the COVID-19 EIDL, the SBA limited loan sizes to the lower of $150,000 or six months of working capital due to the large volume of loan requests received. NOTE: Effective April 7, 2021, loan sizes were increased to the lower of 24 months working capital up to a maximum of $500,000. If your loan was approved prior to the week of April 6, 2021, you have two years from the date you signed your loan to request additional funds.

Individual loan amounts under the EIDL program are determined based on the projected revenue loss an organization might suffer as a result of a disaster. Because projected revenue losses are more difficult to determine in the current pandemic than in a natural disaster — which the EIDL program has typically been used for — organizations may be uncertain about what size loan they are actually eligible for.

While PPP funding provides opportunities to many small businesses and nonprofits, it is designed to primarily cover payroll costs and limited operational expenses. In contrast, the COVID-19 EIDL funds can be used for nearly all working capital needs, subject to restrictions.

EIDL Advances — emergency grants

In addition to loans, emergency grants (EIDL Advance) of up to $10,000, limited to $1,000 per employee, were made available to any eligible organization that applied for an EIDL. The EIDL Advance program was closed in July 2020.

Currently, the SBA is reaching out directly to eligible small businesses — no open application process is available — under the Targeted EIDL Advance program, which would provide additional assistance up to $10,000.

How to apply for an EIDL

If you decide an EIDL is right for your organization, review the FAQs regarding the program and visit the SBA’s online application portal for a detailed walk-through of eligibility requirements and certifications. The EIDL application process is designed to be easy and quick via the portal.

Note that SBA affiliation rules and size standards apply when determining eligibility.

The EIDL application process (Deadline: December 31, 2021)

Currently, the application process uses an initial online application that is reviewed by the SBA and is followed up by a request for supplemental information.

Step 1: Initial online application — The initial form gathers basic information about the organization. Keep in mind that the form is “smart” — it validates data for proper format and unless all fields are filled out appropriately, you cannot advance to the next page. Key information requested includes:

• Gross revenues for the past 12 months through January 31, 2020.
• Cost of goods sold for the past 12 months through January 31, 2020.
• General business information: TIN, business name and address, number of employees as of January 31, 2020, as well as nature of business.
• Ownership information: Business or personal owner? Applicants must provide general information such as ownership percentage and social security number or tax ID for each owner with 20% or more interest.
• Questions related to criminal record and your ability to contract with the federal government.
• Applicant information, whether it be you or a third party.
• Bank account and routing information.
• Certification that all information is truthful.
• Certification that additional information will be provided upon request.

Once the application is submitted, you will be given an application number to use for correspondence with the SBA. An email address and phone number are also provided to check on the application. Throughout the process, you or your main point of contact will receive loan status updates from the SBA via email, as well as any requests for additional information.

Step 2: Follow-up request — Next, the SBA will email your loan application number and a request to set up an account on their online portal. You may be asked to provide the following information (however, at this time, the information below has not been required for all applicants):

• SBA Form 1368: Monthly sales figures beginning three years prior to the disaster and (optional) anticipated forecast for period of the disaster
• SBA Form 2202: Schedule of Liabilities
• IRS Form 4506-T: Request for Transcript of Tax Return
• SBA Form 413: Personal Financial Statement
• IRS Form 8821: Tax Information Authorization
• Most recent historical financial statements

Step 3: Review loan documents — Once you’ve successfully created an account on the SBA portal and your loan is approved, you’ll receive another notification along with the actual loan documents. Carefully review all of the loan provisions. While EIDL proceeds can be used for all types of working capital — as opposed to the limited allowances in the PPP — there are some restrictions to consider before you sign on the “dotted line.”

For instance, loan proceeds cannot be used to:

• Refinance long-term debt.
• Pay off other SBA loans.
• Purchase fixed assets (property, plant, equipment).
• Repair property.
• Pay dividends or distributions to owners or partners.
• Pay bonuses.

In addition, language commonly seen on EIDL agreements includes further restrictions that may remain in place for as long as any portion of the loan is outstanding:

LIMITS ON DISTRIBUTION OF ASSETS: Borrower will not, without the prior written consent of SBA, make any distribution of Borrower’s assets, or give any preferential treatment, make any advance, directly or indirectly, by way of loan, gift, bonus, or otherwise, to any owner or partner or any of its employees, or to any company directly or indirectly controlling or affiliated with or controlled by Borrower, or any other company

Step 4. Before signing, consider your total financial situation — If you are comfortable with the loan restrictions, take stock of all federal monies you have received and review the cross-program eligibility rules before you sign the documents. The EIDL is subject to single audit requirements that are placed on any organizations that use more than $750,000 in one year.

How we can help

The decision to take on additional debt isn’t easy and should be done with care. It’s important to weigh your options and determine whether the individual loan restrictions, reporting requirements, and interactions with other funding sources are suitable for your situation.

Our team can help you review your EIDL options and other funding possibilities and help you determine whether an EIDL might be a help or hindrance to your organization. We can help keep you compliant with their restrictions as well. Give us a call today. 

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