APPLYING FOR AN SBA ECONOMIC INJURY DISASTER LOAN (EIDL)
In response to the COVID-19 pandemic, the federal government has authorized the Small Business Administration (SBA) to provide emergency disaster loans to small businesses affected by the COVID-19 crisis and the slow down in economic activity resulting from the emergency.
These loans are available under the SBA program that is normally used to provide emergency relief to businesses adversely affected by natural disasters such as tornados, hurricanes and earthquakes. In particular, qualifying small businesses and non-profits may apply for up to $2 million under the SBA Economic Injury Disaster Loan (EIDL) program.
EIDL loans may be used to pay fixed debts, payroll, accounts payable and other bills and expenses that companies are unable to pay as a result of the COVID-19 emergency.
It is important to note that the EIDL program is separate and distinct from the programs which may become available under the CARES Act that is expected to be passed by Congress this week. After the CARES Act is enacted, we will provide a supplemental alert discussing SBA funding programs under the CARES Act, especially the terms of the payroll protection loans that are expected to be part of the CARES Act.
How Does a Company Apply For An EIDL Loan? Unlike traditional SBA loan programs such as the popular 7(a) program which utilize commercial banks and other SBA lenders as the contact point for loan applications and disbursement of loan proceeds, small businesses seeking EIDL loans will apply directly to the SBA and receive disbursements directly from the SBA. The SBA application is available at https://disasterloan.sba.gov/apply-for-disaster-loan/index.html.
What Terms Are Available For EIDL Loans? EIDL loans are, in fact, loans – mot grants. EIDL loans are not subject to the forgiveness provisions that are expected to be applicable to certain payroll protection loans under the proposed CARES Act. However, EIDL loans may provide up to $2 million in low-interest loans to small businesses that may be used for permitted working capital purposes.
- Maximum Loan Amount: $2,000,000.
- Interest Rates: 3.75% for eligible small businesses and 2.75% for eligible nonprofits.
- Repayment Terms: Payments may be deferred for 12 months.
- Loan Term: Up to 30 years. The SBA will determine the loan term for each borrower on a case-by-case basis, taking into account the borrower’s ability to pay.
- Use of Proceeds: Proceeds may be used to pay fixed debts, payroll, accounts payable and other bills that can not be paid as a result of the COVID-19 emergency. EIDL loans may not be used for expansion and are not intended to replace lost profits.
- Collateral: Traditionally, the SBA requires collateral for loans under the EIDL program in excess of $25,000. In light of the stated purposes of EIDL loans and the nature of the COVID-19 crisis, we are optimistic that the SBA will be flexible in its collateral requirements for companies without collateral or with existing senior secured debt.
What Forms Are Necessary To Apply? The SBA has modified its normal application process and is requiring fewer forms with the initial application. As of today, the SBA requires the following documents with the initial online application:
- Business Loan Application (SBA Form 5)
- Economic Injury Disaster Loan Supporting Information (SBA Form P-019)
Initially, additional forms were to be required with the original application. Yesterday, the SBA adjusted the application process and now provides that a Disaster Assistance loan officer may contact an applicant and request that it fill out the following additional forms:
- Fee Disclosure Form and Compensation Agreement (SBA Form 159D)
- Personal Financial Statement (SBA Form 413D)
- Request for Transcript of Tax Return (IRS Form 4506-T)
- Schedule of Liabilities (SBA Form 2202)
- Additional Filing Requirements (SBA Form 1368)
- Additional Filing Requirements (SBA Form 413D)
Will EIDL Loans Impact Existing Commercial Loans? Most likely, yes. Companies that have existing loans with commercial banks or non-bank financial institutions should review their existing loan documents and consult with legal counsel. Both secured and unsecured commercial loans often contain covenants that restrict or prohibit the borrower from incurring additional indebtedness. Before closing an EIDL loan (or any other SBA loan), companies should discuss with counsel the need for any required waivers, consents or amendments from existing lenders.
Can an EIDL Borrower Also Take Advantage of CARES Act Payroll Protection Loans? It appears likely that the CARES Act will permit any EIDL loan granted as a result of the COVID-19 emergency will be able to be refinanced by a loan granted under the proposed payroll protection loan provisions of the CARES Act – which may effectively convert all or a portion of the EIDL loan into a payroll protection loan eligible for the forgiveness provisions expected to be contained in the CARES Act for payroll protection loans that meet the terms and conditions of such loan forgiveness.
We will continue to provide updates to our clients and friends regarding important COVID-19 legislation that affects small businesses. If you have any questions regarding the foregoing, please contact Pete Cripps at email@example.com or 215-241-8884.