What is an EIDL? Economic injury disaster loans, like 7(a) loans, are a preexisting SBA program. Read the article to learn if you qualify for an EIDL
In response to the economic devastation caused by COVID-19, Congress passed the CARES Act on March 27, 2020.
We previously published an article about the Paycheck Protection Program, including who qualifies and how to apply. In this article, we’ll discuss the Economic Injury Disaster Loan portion of the CARES Act.
What Is an Economic Injury Disaster Loan?
Economic Injury Disaster Loans (EIDLs), like 7(a) loans, were part of an existing SBA program before the CARES Act.
An EIDL is a low-interest federal loan issued by the SBA to help alleviate the economic injury experienced by small businesses and private nonprofit organizations following a disaster.
Standard EIDL Terms and Eligible Uses
An EIDL is a working capital loan of up to $2 million. The funds can be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid if the disaster had not occurred.
EIDL funds are not intended to be used for business expansion.
Interest rates are 3.75% for small businesses and 2.75% for private nonprofit organizations. The maximum loan term is 30 years.
What Must a Business Demonstrate to Qualify?
Under the standard EIDL requirements, a business must demonstrate:
- An acceptable credit history
- The ability to repay the loan
- A location within a state or county that has received an economic injury disaster declaration
- Substantial economic injury resulting from the disaster
- An inability to obtain credit elsewhere
- Collateral for loans exceeding $25,000
- A personal guarantee for loans exceeding $200,000
- Proper documentation, including an SBA loan application, IRS Form 4506-T, recent federal income tax returns, and personal financial statements for all owners
Which EIDL Requirements Did the CARES Act Waive?
The CARES Act waived the following EIDL requirements:
- Personal guarantees for loans of no more than $200,000 made between January 31 and December 31, 2020
- The requirement that an applicant must have been in business for the one-year period preceding the disaster
- Evidence demonstrating an inability to obtain credit elsewhere
- The requirement to provide the lender with tax returns—the lender may approve an application based solely on the applicant’s credit score
- The requirement to be located in a state or county that received an economic injury disaster declaration from the SBA
Who Is Eligible for an EIDL?
Small businesses and small agricultural cooperatives that meet applicable SBA size standards are eligible for an EIDL. Private nonprofit organizations may also qualify.
The CARES Act expanded eligibility to include:
- Businesses with no more than 500 employees
- Sole proprietorships
- Independent contractors
- Cooperatives with no more than 500 employees
- Employee Stock Ownership Plans with no more than 500 employees
- Tribal small business concerns with no more than 500 employees
When Is a Business’s Size Determined?
For businesses applying for disaster loan assistance, size eligibility is determined as of January 31, 2020.
How Does a Business Apply for an EIDL?
Unlike a Paycheck Protection Program loan, business owners apply for an EIDL directly through the SBA.
Applications can be submitted online, by mail, in person, or over the phone. The SBA will disburse the funds within five days of receiving the executed loan-closing documents.
Can a Business Receive Both a PPP Loan and an EIDL?
A business can apply for loans through both the Paycheck Protection Program and the EIDL program. However, the EIDL funds must be used for a purpose other than covering payroll costs.
Comparing Paycheck Protection Program Loans and EIDLs
When deciding whether to apply for a Paycheck Protection Program loan or an EIDL, businesses should consider the following:
- Eligibility: Eligibility requirements differ between the two programs.
- Maximum loan amounts: Paycheck Protection Program loans are capped at $10 million, with each applicant’s limit determined by a formula tied to payroll costs. EIDLs are capped at $2 million.
- Loan forgiveness: Paycheck Protection Program loans may qualify for loan forgiveness. EIDLs do not offer this feature. However, EIDL applicants may receive an emergency grant of up to $10,000 that does not have to be repaid.
- Maximum maturity: Paycheck Protection Program loans may have maturities of up to 10 years, with no obligation to make payments for up to the first 12 months. EIDLs may have maturities of up to 30 years. EIDL payments can also be deferred for up to one year, although interest accrues during the deferment period.
- Interest rates: Paycheck Protection Program loan interest rates are capped at 4%. COVID-19 EIDL interest rates are 3.75% for businesses and 2.75% for nonprofit organizations.
The Emergency EIDL Grant
What If a Business Needs Money Immediately?
Recognizing that the EIDL approval process could take as long as one month, the CARES Act allowed businesses that submitted applications between January 31 and December 31, 2020, to receive an advance of up to $10,000 within three days after the SBA received the application.
These advances were available only for applications related to COVID-19.
To qualify for an emergency EIDL grant, an applicant had to be eligible for an EIDL and have been in operation since January 31, 2020, when the COVID-19 public health crisis was announced.
Businesses could use the advance for any allowable EIDL purpose under existing law, including:
- Providing paid sick leave to employees unable to work because of COVID-19
- Maintaining payroll
- Meeting increased costs caused by interrupted supply chains
- Making rent or mortgage payments
- Repaying obligations that could not be met because of revenue losses
Does a Business Have to Repay the $10,000 Advance?
No. An applicant is not required to repay the $10,000 advance, even if the SBA ultimately denies the EIDL application.
What Happens If a Business Later Receives a PPP Loan?
The outstanding balance of an EIDL made after January 31, 2020, and before Paycheck Protection Program loans became available may be refinanced into a Paycheck Protection Program loan.
In addition, any emergency EIDL advance received by a borrower who subsequently receives a Paycheck Protection Program loan will be subtracted from the calculation of the loan-forgiveness amount described above.
Questions About EIDLs or the M&A Market?
If you have questions about this program or the current M&A market, contact us or call 908-387-1000.