Expansion of SBA Economic Injury Disaster Loan Program Under the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law by President Trump on Friday, March 27, 2020, contains a host of expanded programs available to small businesses through the U.S. Small Business Administration (SBA). Although the Paycheck Protection Program (PPP) has garnered much of the attention, a $10 billion expansion of the SBA 7(b) Economic Injury Loan Program (the EIDL Program) should not be overlooked. The CARES Act significantly loosened requirements for small businesses and created opportunities for small businesses to utilize the EIDL Program to meet operating expenses during these uncertain times.
The EIDL expansion is in place until December 31, 2020, which extends far past the time period for the PPP and allows eligible entities to borrow up to $2 million to pay:
- payroll expenses;
- paid sick leave;
- accounts payable;
- rent or mortgage payments;
- debt service payments; and
- increased costs to obtain materials due to interrupted supply chains.
Eligible entities include small businesses and private non-profit corporations that were in business as of January 31, 2020.
Small businesses include:
- businesses with 500 or fewer employees;
- sole proprietorships; with or without employees;
- independent contractors
- cooperatives with 500 or fewer employees;
- ESOPs with 500 or fewer employees; and
- tribal small business concerns.
Affiliation rules still apply in determining the number of employees. In reviewing an application, the SBA needs to determine that the entity has the ability to repay the loan. Guidelines on this are expected soon but will likely involve some form of credit score calculation. In order to qualify, an eligible entity also must be able to establish that it suffered an economic injury resulting from the COVID-19 pandemic (i.e. the entity must be unable to meet its obligations and to pay its ordinary and necessary operating expenses).
The loan terms offered under the EIDL program have been made much more generous and include:
- a fixed interest rate of 3.75% (2.75% for non-profits);
- a term of up to 30 years (but determined on a case by case basis);
- limited collateral requirements (loans over $25,000 must be secured by collateral to the extent possible and, if the entity has no collateral, assets of the entity’s owners may need to be pledged as collateral; loans over $200,000 must be personally guaranteed by owners of the entity holding equity of 20% or more); and
- no prepayment penalties.
An attractive portion of the new program provides for an emergency advance of up to $10,000 within three days of application, but subject to SBA’s verification of the entity’s eligibility. The emergency advance can provide an immediate lifeline to entities suffering an immediate cash crunch and is not subject to repayment (even if the EIDL is eventually denied). The emergency advance provision is one area where the EIDL program and PPP program work hand-in-hand in that an emergency advance can be received during the pendency of an application for a PPP loan.
There are, however, certain expenses which are outside the scope of allowable expenses under the EIDL program. These include:
- mere replacement of lost sales or revenue;
- refinancing existing debt;
- making loan payments on other loans owed to federal agencies;
- payment of tax penalties;
- repair of physical damages; and
- payment of dividends or distributions to equity owners of the entity.
Applications for a loan under the EIDL Program can be made online at https://www.sba.gov/disaster/apply-for-disaster-loan/index.html. Due to the multitude of programs available and the intricacies of each, it is not advisable to make application without consulting with one of the Firm’s business attorneys.
For additional information on the PPP program, read our article, "The Paycheck Protection Program Under the CARES Act."
At the date of publication the above information was correct. It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation.
The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.