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Economic Injury Disaster Loans: Another Option for Eligible Applicants

The Coronavirus Aid, Relief, and Economic Security Act includes three programs aimed at providing relief to businesses during the COVID-19 pandemic: the new Paycheck Protection Program, the new Mid-Size Business Loan Program, and an expansion upon the existing Economic Injury Disaster Loan Program.

Prior to the enactment of the CARES Act, loans under the EIDL were only available to small businesses or private, nonprofits that suffered substantial economic injury as a result of a defined disaster on a county-by-county basis. Under the expanded EIDL, $10 billion worth of loans are available on a nationwide basis to eligible applicants who have suffered economic injury as a result of COVID-19, and Congress has relaxed some of the application and lending requirements for EIDL loans under the CARES Act.

The following is a brief summary of the EIDL, as it applies under the CARES Act.

Application Period

January 31, 2020, through December 31, 2020.

Source of Funds

Unlike loans under the PPP, which are funded by banks and guaranteed by the Small Business Administration (SBA), loans under the EIDL are funded directly by the SBA.

Eligible Applicants

Provided that the applicant was in operation on January 31, 2020, small business concerns, private nonprofits and small agricultural cooperatives are eligible for loans under the EIDL, as are businesses, cooperatives, ESOPS and tribal small business concerns with not more than 500 employees and any individual who operates under either a sole proprietorship (with or without employees) or who operates as an independent contractor.

Lender of Last Resort Requirement Waived

Under the CARES Act, an applicant is no longer required to attest that the SBA is their lender of last resort; making it easier for affected applicants to obtain EIDL loans.

Loan Terms

The principal amount of a loan under the EIDL can be up to $2 million with the actual loan amount based on the amount of economic injury. Interest is fixed at either 3.75% for small businesses or 2.75% for nonprofits. Maturity can be up to 30 years and is determined by SBA on a case-by-case basis based on its assessment of the applicant’s ability to repay the loan. There are no upfront fees or early payment penalties charged by SBA.

Permitted Uses of Funds

Loan proceeds are permitted to be used for working capital expenses including paying scheduled debt service on loans, payroll, accounts payable, and other bills that could have been met had the COVID-19 pandemic not occurred.

Prohibited Uses of Funds

Loan proceeds are not intended to replace lost sales or profits or for expansion. Loan proceeds cannot be used to pay distributions to owners, partners, officers or stockholders (except for reasonable remuneration directly related to their performance of services for the business), for pre-disaster working capital needs, for refinancing indebtedness incurred prior to the declared disaster, to make payments on loans owned by another federal agency (including the SBA) or a Small Business Investment Company licensed under the Small Business Investment Act. If a borrower wrongfully uses the proceeds of a loan under the EIDL for impermissible purposes, the loan will accelerate and the borrower will be liable to the SBA for 1.5X of the loan amount. In addition, the borrower may face criminal prosecution or civil or administrative fines or penalties.

Collateral Required

Loans with a principal amount of over $25,000 require collateral, but the SBA has stated that it will not decline an EIDL loan under the CARES Act solely because available collateral will not adequately secure the loan.

Required Documentation

The SBA may approve an application based solely on the applicant’s credit score, without the need to submit a tax return or tax return transcript, or an appropriate alternate method to determine the applicant’s ability to repay.

Personal Guaranty

The requirement of a personal guaranty is waived for loans with a principal amount of $200,000 or less. A personal guaranty will be required if the principal amount of the loan is greater than $200,000.

Proceeds from a PPP Loan May be Used to Repay EIDL Loan

A PPP Loan may be used to pay off the outstanding amount of an EIDL loan obtained under the CARES Act, but in order to qualify for the PPP’s loan forgiveness provisions, the use of proceeds must be compliant with the restrictions under the PPP.

Up to $10,000 Advance on EIDL Loans; Treated as a Grant; Advance Reduces PPP Forgiveness

An eligible applicant that has applied for an EIDL loan under the CARES Act, may request an advance of up to $10,000 prior to the approval of the loan. The advance is treated as a “grant” and the applicant will not be required to repay the advance even if its loan application is subsequently denied. The SBA will fund the advance within 3 days after receipt of the application, based on the applicant’s self-certification (under penalty of perjury) that it meets the eligibility requirements. The advance may be used for working capital, including providing sick leave to employees, maintaining payroll to retain employees, meeting increased costs due to supply chain interruptions, making rent and mortgage payments, and repaying obligations that cannot be met due to revenue losses. If an applicant receives an advance and subsequently transfers into or is approved for a PPP loan, the amount of the PPP loan that is forgiven will be reduced by an amount equal to the advance. In order to qualify for the advance, applicants who submitted their applications prior to March 30, 2020, have been requested by the SBA to fill out its new, streamlined application. The SBA has stated that applying for the advance will not impact the status or slow existing applications.

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