Note: This information is current as of 8:00 a.m. on April 1, 2020.

The Small Business Administration’s Economic Injury Disaster Loan Program (EIDL) is providing up to $2 million in long-term disaster-relief loans to qualifying small businesses for economic injury suffered due to the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) has opened up the EIDL program to more types of small businesses, relaxed some of the personal collateral requirements, and streamlined the application process. The expanded EIDL program also offers small businesses up to a $10,000 emergency cash advance that may not need to be paid back.

Loans under the EIDL program are separate and distinct from loans under the new Paycheck Protection Program (the “PPP”) established by the CARES Act, which we summarized here. For many small businesses, we believe that the PPP loans will be a more attractive financing option. In limited circumstances, it could make sense to obtain loans under both programs. Please contact us to discuss whether this makes sense for your business.

The following FAQs provide information about qualification and the application process. For more information from the SBA:

  • Click here to access SBA resources and apply online
  • Click here to access the SBA’s size standards tool if unsure whether you qualify as a small business.

Does my business qualify?

First, your business must qualify as a small business. Generally speaking, you are considered a “small business” if you either (a) have 500 or fewer employees, or (b) have more than 500 employees but are otherwise considered “small” under the SBA’s size standards. Size requirements vary by industry and are usually determined by your number of employees or average annual receipts. For information and tools to determine the size of your business, visit the SBA’s size standards tool linked to above, or find more information at “Table of Size Standards”. Certain other types of businesses may also qualify – see the loan application for more details.

Second, you must be able to demonstrate that the COVID-19 pandemic is the result of your economic injury or hardship, and demonstrate how you expect it to continue to impact your business, especially for the next six months. Most eligible businesses should be able to easily satisfy this requirement.

Is this the best option for my business?

If your business is experiencing financial hardship due to the COVID-19 pandemic, the EIDL may be right for you. However, you should give careful consideration to the personal collateral requirements, to the extent they apply, and whether a PPP loan would be a better option. As noted above, some businesses may want to apply for loans under both programs.

How much can I borrow?

The SBA will determine the exact amount you can borrow based on cash flow projections and demonstrated need, up to $2 million, with the goal being to keep your business solvent. As stated above, the loan amount may also depend on factors including the financial position of the principal owners of the business.

We recommend providing as much financial detail as possible as part of the loan application and, if possible, being very specific about the amount you are seeking to borrow, with corresponding projections showing why this amount is necessary for you to be able to pay your bills and make payroll in the ordinary course of business. Practically speaking, with millions of applications pouring in over the next few weeks, it seems unlikely that the SBA’s loan officers will have the bandwidth to critically scrutinize your application and challenge any reasonable assumptions included in your financial projections.  In short, you want to give the loan officer reasons to say “yes” instead of reasons to say “no.”

What are the loan terms?

Unlike the PPP loans and other traditional SBA loans, which are handled by third-party banks, EIDLs are underwritten, administered, and serviced directly by the SBA. Term length is either 15 or 30 years. We have received guidance from the SBA that the “default” term is 15 years, but that it may be extended to 30 years if the business demonstrates that it needs to minimize its monthly P&I payments under the loan. Current interest rates are 3.75%, but may change as the program continues to evolve. If interest rates go down, the expectation is that the reduced interest rate will apply retroactively to all borrowers under the program.

Borrowers can defer principal and interest payments for the first 11 months of the loan, with the first payment becoming due 12 months from the loan date. It is not expected that any portion of the loan will be forgiven. There are no prepayment penalties.

Are there restrictions on how the loan proceeds can be used?

Yes, funds can be used only to pay expenses that arise in the ordinary course of business, not for expansion, development, CapEx items, or other similar projects. Loan proceeds also may not be used to pay down long-term liabilities, refinance existing debt, or make distributions or other payments to owners. You will need to keep track of how you used the proceeds for 3 years in case of an SBA audit.

What are the collateral requirements?

As mentioned above, the CARES Act waives the personal guaranty requirement for loans less than $200,000. However, businesses borrowing more than $200,000 under this program should expect to provide personal guaranties from any person who owns more than 20% of the business. In addition, if the business is owned by another business or entity, the SBA will require a personal financial statement (and corresponding personal guaranty and/or pledge of personal assets) from the individual(s) who ultimately own the business.

Based on current guidance from the SBA and the new streamlined EIDL application, it is unclear if the SBA is still seeking pledges of personal collateral from the principal owners for loans less than $200,000 or if the provision in the CARES Act that waived the personal guaranty requirement was also intended to waive the personal collateral requirement. For loans over $200,000, business owners may still be required to provide (in addition to a personal guaranty) a pledge of personal assets as collateral to secure the loan, which may include mortgages on real estate in which the owner has significant equity, including any personal residence. Historically, this was a requirement for the EIDL program, but it is not clear how strictly the SBA is enforcing it in light of the current crisis. To the extent that the SBA does, in fact, require a personal guaranty and/or a pledge of personal assets, it is very important to carefully think through the legal implications, especially in light of the current economic climate.

How do I apply?

Applicants can find more information at https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources and apply online at https://covid19relief.sba.gov/ or by phone at 1-800-659-2955 through the SBA Customer Service Center.

How long until applications are processed and funds are available?

Current processing and funding time is around three weeks after application, with expectations of a dramatic increase in processing times as application numbers continue to grow. We have heard that millions of applications have already been submitted in the past few weeks.

What if I need the money now?

Applicants to the EIDL program can now apply for an EIDL loan advance of up to $10,000. This advance does not have to be repaid and successful applications will have funds made available to them within three (3) days of applying.

We have spoken to several commercial banks (including several of our banking clients) who may be willing to provide short-term bridge loans to eligible businesses that have applied for an EIDL but are still waiting for it to be funded. We would be happy to connect you with the right people if you’d like to explore this further.

Conclusion

If an EIDL appears to be right for your business, it is advisable to apply as soon as possible and provide as much information as possible to help the loan officer quickly evaluate and approve your application. If funded, your business can decide whether to proceed based on the EIDL offer and terms.

Note to Minnesota businesses: Qualifying Minnesota small business applicants may also apply for the Small Business Emergency Loan Program for emergency relief loans from $2,500-$35,000. More information is available here: https://mn.gov/deed/business/financing-business/deed-programs/peacetime/.