When the Economic Injury Disaster Loans (EIDLs) first became available on March 30th, small businesses applied for them in droves. In general, these loans only provide assistance when natural disasters occur i.e. tornados, floods, or wildfires. However, after President Trump declared COVID-19 a national emergency on March 13th, the door was opened for small businesses all over the country to search for emergency financing.
With the future remaining uncertain, business owners saw the program’s maximum $10,000 advance as a way to keep their doors open. he unfortunate thing is that the rollout of the program had been much rougher than anticipated, and there had been a flood of applications that overwhelmed the system. That was when the SBA was forced to stop accepting new applications.
On top of that, the SBA didn’t reveal anything for several weeks about the status of the applications that had been submitted. The advances that were supposed to be sent within 3 days of applying had been delayed for weeks and adjusted to $1,000 per employee, or $1,000 for the self-employed.
However, the advances started to mysteriously show up in the bank accounts of applicants a couple of months ago. The SBA has also started processing and approving thousands of the original applications. Therefore, it seems like a good time to revisit the EIDL program and how their loans work.
Overview of the Loan Terms
The EIDLs provide many favorable terms to businesses, and these include the following:
- Loans up to $2 million
- 30-year terms
- Interest rates of 3.75% for small businesses (2.75% for non-profits)
- First payment is 12 months from the date of the promissory note
- EIDLs smaller than $200,000 can be approved without a personal guarantee
- For loans under $25,000, the SBA doesn’t take a security interest in the collateral
- For loans above $25,000, the SBA takes a general security interest in any and all collateral that was defined in the promissory note
- There are no repayment fees
The major difference here is that unlike the Paycheck Protection Program (PPP) loan, the EIDLs don’t have any forgiveness aspect to them. However, any advance funds that you have received are going to be included in the loan amount.
On top of that, you can request a loan increase for any additional disaster-related damages as soon as you have the need for additional funds. However, the SBA isn’t going to consider a request for a loan increase that was received more than 2 years from the date of the loan approval, unless ‘there are extraordinary and unforeseeable circumstances beyond the control of the borrower’.
It’s all about the details, and the document is 19 pages long, which is why you must ensure that you read it carefully before you sign off on the loan. Here are a couple of sections that caught our eye:
The Security Interest Requirement
For loans that were over $25,000, the SBA can lay claim on any tangible and intangible personal property including, but not limited to:
- Instruments, including promissory notes
- Chattel paper, including tangible chattel paper and electronic chattel paper
- Letter of credit rights
- Accounts, including health-care insurance receivables and credit card receivables
- Deposit accounts
- Commercial tort claims
- General intangibles, including payment intangibles and software
- As-extracted collateral like terms may from time to time be defined in the Uniform Commercial Code
The language can be confusing if you don’t have a degree in ‘secured loans’. You should note, though, that you ‘can’t sell, lease, license, or otherwise transfer’ any part of the collateral or interest in the collateral without the consent of the SBA, with the exception of inventory in the ordinary course of business.
It essentially means that if you’re a business that is selling products, you don’t need any permission to sell the things that you normally sell. You need to be aware of this clause and contact legal counsel if you want to get rid of a business asset that may be included in the claim of the SBA.
What Can You Use this Loan for?
Unlike the PPP loan, which can only be used for payroll, business mortgage interest, business rent, or lease payments and business utility payments, the EIDL loan funds can be used for an extensive range of business working capital “to alleviate economic injury caused by a disaster occurring in the month of January 31, 2020 and continuing thereafter.”
That definition is a little vague, but the SBA has provided some additional guidance in supplemental materials. Here eligible expenses include:
- Fixed debts (rent, etc.)
- Accounts payable
- Some bills that could have been paid if the disaster hadn’t occurred
They also provide a long list of funds that loans can’t be used for:
- Dividends and bonuses
- Disbursement to owners, unless for the performance of services
- Repayment of stockholder/principal loans (with exceptions)
- Expansion of facilities or acquisition of fixed assets
- Repair or replacement of physical damages
- Refinancing long-term debt
- Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a small business investment company
- Payment of any part of direct Federal debt, (including SBA loans) except IRS obligations
- Relocation (however, you can request written consent to relocate)
Obviously, you will need to keep track of how you are using these loan funds, and you will want to establish a separate business account for operating expenses if you don’t have one already.
The SBA wants that you keep books and records “for the most recent 5 years until 3 years after the date of maturity, including extensions, or the date the loan has been paid in full, whatever comes first.” Apart from that, you will also need to keep ‘itemized receipts (paid receipts, paid invoices, or canceled checks) and contracts for all loan funds spent.’ In short, it’s highly important that you keep good records.
How Will this Work with PPP and Unemployment Benefits?
Most small businesses took advantage of all the benefits that were made available to them, including the( EIDL, PPP, and unemployment benefits). Now all the benefits are being approved together, and it’s difficult to know how they will all work together. There has been no information provided as to how these programs are going to complement one another as of yet.
However, we do have knowledge that EIDL funds can’t be used for losses that are compensated by other sources. Other sources include but are not limited to:
- Proceeds of policies of insurance or other indemnifications
- Grants or other reimbursements (including loans) from government agencies or private organizations
- Claims for civil liability against other individuals, organizations or governmental entities
- Salvage (including any sale or re-use) of items of damaged property
PPP funds have been included in the category of grants or other reimbursements. The government has made it clear that you can have both types of loans if they are being used for different expenses or “not for the same purpose.” It’s a good idea to keep these funds separate.
The EIDL funds can then be used for your other operating expenses.
It’s still not clear how these funds are going to affect your ability to receive the Pandemic Unemployment Assistance (PUA). The only knowledge we have received from the treasury states “you should be aware that participation in the PPP may affect your eligibility for state-administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle A of the CARES Act, or CARES Act Employee Retention Credits.”
It is best to avoid double-dipping, as in most states, you must certify your income every two weeks. If you’re using these funds for payroll, you must let them know. In the EIDL loan documents, the SBA states that it will use “its sole to discretion determine whether any such compensation from other sources is a duplication of the benefits.” So you must keep good records.
Just like the PPP , the EIDLs also has certain requirements that it must adhere to. You should read them all carefully before you accept the loan
. Here were some that stood out to us:
- There has been no substantial adverse change in the Borrower’s financial condition (and organization, in case of a business borrower) since the date of the application for this Loan. (Adverse changes include, but are not limited to: judgment liens, tax liens, mechanic’s liens, bankruptcy, financial reverses, arrest or conviction of a felony, etc.).
- No claim or application for any other compensation for disaster losses has been submitted to or requested of any source, and no such other compensation has been received, other than that which Borrower has fully disclosed to SBA.
- Borrower certifies that no fees have been paid, directly or indirectly, to any representative (attorney, accountant, etc.) for services provided or to be provided in connection with applying for or closing this Loan, other than those reported on the Loan Application. All fees not approved by SBA are prohibited.
For loans that had been over $150,000, the SBA requires recipients to agree to the following conditions:
- Appropriated funds may NOT be used for lobbying.
- The payment of non-federal funds for lobbying must be reported on Form SF-LLL.
- The language of this certification must be incorporated into all contracts and subcontracts exceeding $100,000.
- All contractors and subcontractors with contracts exceeding $100,000 are required to certify and disclose accordingly.
If you answer any of these questions dishonestly you may be subjected to civil and/or criminal penalties.
A Way Ahead for Small Businesses
The EIDL is a life raft to companies struggling to stay afloat. Main street has been hit hard by the coronavirus pandemic, and a lot of small businesses have been forced to close their doors. These loans provides financial relief and breathing room at a critical time.
If you have a small business that is struggling right now, help is on the way. The Federal Government and SBA have really stepped up with some comprehensive programs to help you not only survive this crisis, but thrive. If you are still in need of assistance, or need help navigating all of these programs, please give me a call at (732)759-5114 or email me at firstname.lastname@example.org. I am here to help.