Economic Injury Disaster Loan Program
The CARES Act
On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The CARES Act provides an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, small business loans, increased unemployment benefits, and a variety of tax breaks.
Specifically for small businesses, the CARES Act enhances other recent changes made to expand the Small Business Administration’s Economic Injury Disaster Loan (“EIDL”) program in response to the COVID-19 pandemic. Previously, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, provided the SBA an additional $20 million for SBA disaster assistance administrative expenses and deemed the coronavirus to be a disaster under the SBA’s EIDL program. This change made economic injury from the coronavirus an eligible EIDL expense. The CARES Act changes are generally designed to further expand access to EIDLs and to reduce the time required to obtain EIDL funding.
Under the CARES Act, Congress has appropriated $10 billion of additional funding for EIDLs. Unlike the Paycheck Protection Plan which is administered by the Small Business Administration, EIDLs are made directly by the SBA without involving a third party lender. EIDL loans may be in amounts not exceeding $2 million, and payments of principal and interest under all new and existing EIDLs will automatically be entitled to deferment through the remainder of 2020.
A borrower cannot receive a Paycheck Protection Plan loan in addition to an Economic Injury Disaster Loan (EIDL) through the SBA for the same purposes. However, a borrower who has an EIDL loan unrelated to COVID-19 may apply for a Paycheck Protection Plan loan (with an option to refinance the EIDL loan into the Paycheck Protection Plan loan). The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.
Expanded Eligibility and Reduced Application Requirements
Ordinarily, to qualify for an EIDL, the applicant must establish that it is a small business concern, private nonprofit organization, or small agricultural cooperative. The Small Business Act's definition of “small business” is a business that:
- is organized for profit;
- has a place of business in the United States;
- operates primarily within the United States or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor;
- is independently owned and operated;
- is not dominant in its field on a national basis; and
- does not exceed size standards established, and updated periodically, by the SBA.
The CARES Act has expanded this eligibility criteria to also include any business with less than 500 employees. The business may be a sole proprietorship, partnership, corporation, or any other legal form.
The SBA is waiving its credit-elsewhere test, meaning that small businesses with credit available elsewhere remain eligible for loans under the EIDL program. The previous EIDL requirement that an applicant be in business for one year prior to date it applies for an EIDL also is waived, so long as the business was in operation by January 31, 2020.
Personal guarantees will not be required for loans of less than $200,000.
The SBA is foregoing some of its ordinary requirements to speed up the application process. For example, according to SBA officials, for loans of $500,000 or less, the SBA will rely on the applicant to certify that it is a small business concern. Also, the SBA will not require prior year tax returns to be included in the application. The CARES Act authorizes the SBA to approve EIDLs based solely on an applicant’s credit score or “alternative appropriate methods” for determining the applicant’s ability to pay.
Terms of Loan
EIDLs are long-term loans with varying repayment terms of up to 30 years, with loaned amounts determined by actual economic injury, up to $2 million, which can be used for certain delineated working capital needs (payment of fixed debts, payroll, accounts payable, employee sick leave and other bills that cannot be paid due to a disaster’s impact). The SBA determines an appropriate installment payment based on each borrower's financial condition, which, in turn, determines the loan term.
There are no upfront fees or early payment penalties charged by the SBA with respect to such loans. SBA EIDL interest rates for COVD-19 are 3.75% for businesses and 2.75% for nonprofit organizations.
$10,000 Advance without Repayment Obligation, Even if Application is Denied
In an effort to get necessary funds into the hands of businesses suffering as a result of COVID-19 as quickly as possible, the CARES Act includes $10 billion in funding for a provision to provide an advance of $10,000 to small businesses and nonprofits that apply for an EIDL within three days of applying for the loan. This advance need not be repaid even if the applicant is subsequently denied an EIDL.
- Advanced funds may be used for any purpose allowable under Section 7(b)(2) of the Small Business Act, including:
- Providing paid sick leave to employees unable to work due to the direct effect of the COVID-19;
- Maintaining payroll to retain employees during business disruptions or substantial slowdowns;
- Meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains;
- Making rent or mortgage payments; and
- Repaying obligations that cannot be met due to revenue losses.
Deferment of Loan Payments
Under present law and regulations, the first SBA EIDL payment is normally due five months after disbursement. However, the SBA has announced that it is changing the terms of new EIDL assistance to allow for deferment through December 31, 2020 "to help borrowers during this unprecedented time." The CARES Act requires lenders to provide "impacted borrowers" adversely affected by COVID-19 complete payment deferment relief on a covered loan for not more than one year if the borrower was in operation on February 15, 2020, and has an application for a covered loan approved or pending approval on or after the date of enactment.
The CARES Act includes $17 billion in funding for a provision to provide immediate relief to small businesses with standard SBA 7(a), 504, or microloans. Under this provision, SBA will cover all loan payments for existing SBA borrowers, including principal, interest, and fees, for six months. While SBA borrowers are receiving the six-month debt relief, they may apply for a Paycheck Protection Program loan that provides capital to keep their employees on the job.
A business that receives an EIDL between Jan. 31 and June 30, 2020, as a result of a COVID-19 disaster declaration is eligible to apply for a Paycheck Protection Program loan or the business may refinance their EIDL into a Paycheck Protection Program loan, but the funds may not be duplicative. A borrower cannot receive a PPP loan in addition to an Economic Injury Disaster Loan (EIDL) through the SBA for the same purposes. However, a borrower who has an EIDL loan unrelated to COVID-19 may apply for a PPP loan (with an option to refinance the EIDL loan into the PPP loan). The emergency EIDL grant award of up to $10,000 would be subtracted from the amount forgiven under the Paycheck Protection Program.
What remains to be seen is how fast the SBA responds to what is sure to be an overwhelming number of requests to obtain loans under this program. As with all aspects of COVID-19, this is a fluid and rapidly changing environment and SBA loan applicants should closely monitor developments.