By Steven Davidson
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The Coronavirus is proving to be a more persistent problem than expected, which is forcing everyone to keep making adjustments. For small business owners, these adjustments are becoming increasingly slim. Loan and grant programs are being drained and owners have less places to turn for lifelines, which is why now is the time to be looking at the programs that are looking to add another round of relief. The Small Business Association is looking to do just that with its Economic Injury Disaster Loan (EIDL) by reopening its applications to all small business owners who qualify.
What is the Economic Injury Disaster Loan?
The EIDL is a loan provided by the Small Business Administration to help businesses and nonprofits in times of disaster and is designed to supplement loss of revenue. This program was an already existing option for small businesses in need of relief before the Coronavirus pandemic but has been adjusted to meet the current national demand. When the pandemic first began closing doors, the program was expanded for all small businesses but quickly had to close applications to all non-agricultural businesses. In March, the CARES Act provided $10 billion to the program and another $10 billion was added in April’s House Resolution, but still needed to halt applications for non-agricultural businesses. Currently, applications are again being accepted from all small businesses in need.
So how has the EIDL changed in response to the Coronavirus? It is usually only given to small businesses on a case-by-case basis, but the CARES Act has changed this by allowing all small businesses who qualify to apply for the loan. The maximum amount available has been lowered from $2 million to $150,000 according to CNBC. CNBC also reports that 57% of applicants have been approved, 38% are still awaiting decisions, and only 5% were denied a loan.
Who Qualifies? (click HERE)
The EIDL is available in all states and only approved for applicants which are:
● A business with not more than 500 employees.
● An agricultural enterprise with not more than 500 employees.
● An individual who operates under a sole proprietorship, with or without employees, or as an independent contractor.
● A cooperative with not more than 500 employees.
● An Employee Stock Ownership Plan (ESOP), as defined in 15 U.S.C. 632, with not more than 500 employees.
● A tribal small business concern, as described in 15 U.S.C. 657a(b)(2)(C), with not more than 500 employees.
● A business, including an agricultural cooperative, aquaculture enterprise, nursery, or producer cooperative (but excluding all other agricultural enterprises), with more than 500 employees that is small under SBA Size Standards.
● A business with more than 500 employees that is small under SBA Size Standards
● A private non-profit organization that is a non-governmental agency or entity that currently has an effective ruling letter from the IRS granting tax exemption under sections 501(c),(d), or (e) of the Internal Revenue Code of 1954, or satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law, or a faith-based organization.
Those who fall into one of these categories must fulfill ALL of the following requirements:
● Applicant is not engaged in any illegal activity (as defined by Federal guidelines).
● No principal of the Applicant with a 50 percent or greater ownership interest is more than sixty (60) days delinquent on child support obligations.
● Applicant does not present live performances of a prurient sexual nature or derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature.
● Applicant does not derive more than one-third of gross annual revenue from legal gambling activities.
● Applicant is not in the business of lobbying.
● Applicants cannot be a state, local, or municipal government entity and cannot be a member of Congress.
Other Loan Requirements:
● Loan Application
● Sole Proprietorship Only Application
● Tax authorization for 20% owners, 50% affiliates, and general partners
○ Along with additional information on all people who fall into this category such as social security number, birthplace, date of birth, citizenship status, and street address
● Past 3 years of business tax returns
● Personal financial statements of 20% owners and general partners
● Schedule of liabilities
● Bank information for loan deposit
● Other information like personal tax returns for some owners and affiliates and profit-and-loss statements
How Much is the Loan for?
The SBA usually allows for loans up to $2 million, though due to the huge economic impact of Covid-19, the amount has been lowered to $150,000. This is still a significant amount, so it is important to be careful filling out your application and be sure to have all your finances in order.
The application will use a 2-phase process:
Phase 1: The following factors are used to determine loan amounts:
● Operating losses: Gross revenues and costs of goods sold for the last 12 months as of January 31, 2020
● Rental Losses: lost rents due to disaster
● Non-Profits: Cost of operations for the last 12 months as of January 31, 2020
● Usually a 4-6x multiple of historical Monthly Average Gross Profits
Phase 2: Bases decision for amount on trend adjusted to lost gross profits over injury period. This phase may require additional documentation.
These are not specific guidelines for their decision making, but just factors that come into play when they are deciding. The SBA has not released a specific guidance for calculation, but they have been reported as giving up to 6 months of working capital.
Funds can take some time to reach your account, so patience will be necessary. Once you submit your application, you will be assigned a loan officer. They will routinely ask follow-up questions and possibly require additional information, so timely responses to these requests will make the process much faster.
Further information can be found HERE.
What are the Terms of the Loan? (click HERE)
The loan is for 30 years at a rate of 3.75% for small businesses and 2.75% for nonprofits. Loans can be used for a broad range of expenses. It provides working capital for business expenses as well as operating expenses like continuation of health care benefits, rent, utilities, and fixed debt payments.
How Do I Apply and What Do I Need?
Below is a list of what you will need to start your application.
● First: Register through the SBA’s Disaster Loan Portal found on their website, where you will be asked to create a username and password and provide your business address.
● You will then start the application process by filling out the filing requirements and personal information.
● For a look at the application, click HERE (Also Known as the Form 5 of Your Application).
○ For this, you will need a personal financial statement, statement of liabilities, IRS 4506T form, and taxes.
● Sole proprietors will need to complete a Form 5c instead (click HERE).
The SBA has provided a detailed explanation with pictures to help you with the application process, so use the outline while filling yours out HERE.
Important Things To Note
There are No Longer Emergency Grants Available with the Loan
Normally, the loan comes with an advance grant which does not need to be repaid, but this is not currently available. Advances are parts of a disaster loan that are paid to businesses before they are approved for a loan. Advances do not need to be repaid and are deducted from the loan amount owners are eligible for. The grant is for $1,000 per employee with a maximum amount of $10,000. Legally, the SBA cannot continue this program until there is more funding allocated for advances. So until this happens, loan applications will be accepted without offering the advance. Stay up-to-date on the EILD, as more funding in the future may mean less debt on your loan. For SBA’s current status on the EIDL, click HERE.
The EIDL Can be Coupled with the Paycheck Protection Program
First of all, it is important to distinguish the differences between an EIDL and PPP loan. A PPP loan is for up to $10 million and must have 60% used for payroll costs to be forgiven, while an EIDL is for $150,000 and no longer has partial forgiveness through the advance program. The EDIL can be used for a much broader purpose of financial obligations and operating expenses that could have been.
Currently, the PPP loan is unavailable for new applicants, as the window closed at the end of June, but the window may be extended until December 31, 2020 if the HEROES Act is passed (described in more detail below). Assuming the PPP reopens and business owners have not yet applied for either program yet, here is a look into how the two programs interact. If you apply for an EIDL and do use it for payroll purposes, it has no effect on a PPP loan, so disregard the following information.
Those who applied for an EIDL, which have used part of this loan for payroll expenses and later want to use the PPP loan, will need to refinance their EIDL when doing so. Doing this will essentially give you more money on your PPP loan to pay off the disaster loan. The way your new PPP loan is calculated is by taking 2.5 times monthly payroll of 2019 and adding the outstanding amount of the disaster loan. The forgiveness is then calculated based on 60% use of both the PPP and EIDL for payroll expenses. IF THE PPP REOPENS, this is an easy way to have the full EIDL loan forgiven.
For more information about the connection between the PPP and EIDL, click HERE.
HEROES Act Looks to Add Even More Funding to EIDL and PPP
The HEROES Act is the proposed second round of Coronavirus aid. Its 1,800 page proposal includes increased funding for both the EIDL and PPP loans. It proposes another $10 billion to aid the EIDL grant and loan program, so small businesses can get forgivable advances on their loans again. The Act also gets rid of the 60% payroll expense requirement on PPP loans, so it could potentially be easier to have your disaster loan forgiven by using the refinancing option through the Paycheck Protection Program.
HERE is more information on the proposed changes to the programs.
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