As the Coronavirus (COVID-19) pandemic brings the U.S. economy to a grinding halt, small businesses are experiencing an unprecedented fiscal crisis. Mandated to shut their doors by state and local governments, these businesses find themselves suffering financially. According to a survey by the National Federation of Independent Business, released on March 13, 2020, 23% of small businesses are already being hurt because of the coronavirus outbreak. For the small businesses that reported they had not yet been affected, 43% indicated their business would be hurt if the Coronavirus (COVID-19) outbreak spreads more broadly in their immediate area over the next three months. As a result of slow sales and disruptions in the supply chain, businesses are having to lay off employees and are unable to pay their bills. To put it simply, small businesses are running out of cash.
Recognizing the devastating effect the economic downturn will have on small businesses, the U.S. Small Business Administration (“SBA”) has targeted low-interest loans to small businesses and private nonprofit organizations that have been severely impacted by the Coronavirus (COVID-19). The SBA will be administering two loan programs which will provide the crucial financial relief until such time as businesses resume normal operations. The first is the Paycheck Protection Program (“PPP”), a $350 billion program which will make available to American small businesses eight weeks of cash-flow assistance by way of 100% federally guaranteed loans. The second is the Economic Injury Disaster Loan (“EIDL”) designed to provide up to $2 million of financial assistance (actual loan amounts are based on amount of economic injury) to small businesses or private, nonprofit organizations that suffer substantial economic injury as a result of the declared disaster, regardless of whether the applicant sustained physical damage. This article addresses the EIDL Program.
On March 6, 2020, Congress signed into law P.L. 116-123 (the “CARES Act”). In addition to providing significant supplemental funding, the CARES Act established the Coronavirus (COVID-19) outbreak as a declarable disaster under the Small Business Act. The action allows the Small Business Administrator to issue disaster declarations that make its EIDL program available to eligible small businesses. On March 16, 2020, the SBA Administrator began issuing declarations in response to states seeking SBA disaster assistance for small businesses. These declarations are not automatic, they must be requested by a state governor and certified by the SBA. On March 20th, Governor Andy Beshear successfully applied and qualified the entire Commonwealth of Kentucky for the disaster certification. Now, small businesses and private nonprofits anywhere in Kentucky that have been harmed by the COVID-19 pandemic are eligible to apply for EIDL. The Governors of Georgia and Indiana, on March 18, 2020 and the Governors of Tennessee and Virginia, on March 20, 2020, each received disaster certification, respectively.
What Are EIDLs?
The EIDL program offers up to $2 million in working capital assistance to small businesses to offset the temporary loss of revenue they are currently experiencing. The actual loan amount will be based on the financial impact of the Coronavirus (COVID-19) and therefore, the SBA will assess actual economic injury suffered by the applicant. Specifically, an applicant will need to show that it experienced a loss effective January 31, 2020, to the date of the application and/or will experience a loss in the future as compared against its 2019 financials. The EIDL is administered by the SBA directly unlike the Paycheck Protection Plan program which is administered by a qualified SBA lender. These loans provide working capital which may be used to pay fixed debts, payroll, accounts payable, and other bills that can’t be paid because of the disaster’s impact. The loan proceeds will not cover lost sales or revenue and the loan proceeds are not available to pay down existing long-term debt. The terms of the EIDL include the following:
- Loan Amount. A maximum of $2 million.
- Interest Rates. The interest rate for small businesses without credit available is 3.75%, and 2.75% for nonprofit organizations. The interest rate is fixed for the term of the loan.
- Term of the Loan. The term of the loan will be determined by the SBA based on an applicant’s ability to repay, up to a maximum of 30 years, which is designed to keep payments on these loans affordable. While the SBA states that terms will not exceed 30 years, each individual loan’s term is determined on a case-by-case basis, based upon each borrower’s ability to repay. Accordingly, the SBA will determine an appropriate installment payment based on the financial condition of each borrower, which in turn will determine the loan term.
- Payment Terms. All EIDLs that are approved during the Coronavirus (COVID-19) pandemic will have initial payments deferred for a year, commencing from the date of the loan. The SBA will determine the appropriate installment payments based on the financial condition of the borrower.
- Collateral and Guarantees. Collateral is generally required for loans over $25,000 if it is available, though SBA will not reject loans for a lack of collateral. No personal guarantee on advances and loans below $200,000. For loan amounts over $200,000, the SBA may require personal guarantees or other forms of collateral, such as real estate. If a business is found to have business interruption insurance that will provide financial relief to the applicant, the applicant will not be denied the loan, but will be required to pledge the proceeds to repay the loan.
- Fees & Penalties. There are no upfront fees (application, origination, etc.) or prepayment penalties.
- Credit Available Elsewhere Test. Applicants will not have to establish that it had been denied credit by a lender. This standard requirement used in disaster loan situations has been waived in the case of EIDLs with the passage of the CARES Act. The SBA will determine the applicant’s credit worthiness based on the documentation presented.
Emergency EIDL Grants
In addition to the standard EIDLs, small business owners in all U.S. states, Washington D.C., and territories, as part of the CARES Act, are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000 (“Emergency EIDL Grant”). The Emergency EIDL Grants will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds approved as an Emergency EIDL Grant will be made available within three days of a successful application, and will not have to be repaid, even if the borrower is later denied for a standard EIDL. As a condition to disbursing the advance payment, the SBA will require that the borrower file a certification, under penalty of perjury, that it is eligible to apply for a EIDL. The applicant’s business must have a physical presence in the declared disaster area. An applicant’s economic presence alone in a declared area does not meet this requirement. The physical presence must be tangible and significant. Merely having a P.O. Box in the disaster area will not qualify as a physical presence. A recipient may use the grant proceeds for a number of purposes, including: (i) providing paid sick leave to employees unable to work due to the direct effect of the Coronavirus (COVID-19); (ii) maintaining payroll to retain employees during business disruptions and substantial slowdowns; (iii) meeting increased costs to obtain materials from the borrower’s original source due to supply chain disruptions; (iv) making rent or mortgage payments; and (v) repaying obligations that cannot be met due to revenue losses; however, the proceeds cannot be used to refinance existing debt.
Who Is Eligible for EIDLs?
As a standard SBA program, only qualified small businesses as defined by the SBA’s Size Standards and the North American Industry Classification System (NAICS) codes may apply for EIDLs. The same size standard is applied here as the SBA applies in its 7(a) loan program. Depending on the industry, a small business may include a business with a maximum of 250 employees or a maximum of 1,500 employees, but the CARES Act states that any business with less than 500 employees will, with respect to EIDLs, qualify as a small business.
Applicants applying for EIDLs and/or Emergency EIDL Grants can conduct business as sole proprietorships, LLCs, corporations, private nonprofit organizations, independent contractors, agricultural cooperatives, Employee Stock Ownership Plans, and tribal business concerns. There are, however, a number of businesses and industries that are explicitly ineligible to receive financial aid. Ineligible businesses include: (i) any business that engages in any illegal activity; (ii) any business in which a principal who owns a 50% or greater interest is delinquent on child support payments; (iii) an agricultural enterprise which is not an agricultural cooperative, nursery, or aquacultural enterprise; (iv) any business engaged in sexual performances or any performance of a prurient nature or derives more than de minimis gross income from the sale of products or services of a prurient sexual nature; (v) any business that derives more than a third of its gross annual revenue from legal gambling activities; (vi) any business engaged in lobbying; and (vii) any business that is a local, state, or municipal governmental entity or owned by a member of Congress.
Finally, all applicants who apply for EIDLs or Emergency EIDL Grants will be placed into one of three groups to determine the dollar amount and terms of their loan: (i) businesses directly affected by the disaster; (ii) businesses that offer services directly related to the businesses in the declaration; and (iii) other businesses indirectly related to the industry that are likely to be harmed by losses in their community. There is no specific time period a business must be in operation. However, all applicants must produce financial and business documentation which establishes a viable business.
How to Apply for EIDL Assitance and Emergency EIDL Grants
The SBA is recommending that eligible small businesses complete the EIDL application online here. It does offer a paper application and forms, but filing electronically is easier, faster, and often more accurate. The SBA has enlisted the services of Small Business Development Centers (SBDCs) to assist with the application process. The list of SBDCs is available online here and then searching for “Small Business Development Centers.” Applications for EIDL assistance and Emergency EIDL Grants will require applicants to compile appropriate information for review and analysis, including: (i) Tax Information Authorization (IRS Form 4506T) for the applicant, principals, and affiliates; (ii) complete copies of the most recent Federal Income Tax Return; (iii) Schedule of Liabilities (SBA Form 2202); (iv) Personal Financial Statement (SBA Form 413); (v) profit and loss statements; and (vi) monthly sale figures (SBA Form 1368). Once an application is submitted, approval for EIDL assistance is likely going to be determined based on the volume of applications, but it is our understanding that loans are processed on a first-come, first-served basis. In the past, approval of EIDL assistance has been two to three weeks with disbursement within up to five days after that. Under the current circumstances, it is unclear at this time how long this approval and payment process with take. Once approved, a borrower can request a loan increase, however, the applicant will need to submit a formal written request for a loan increase along with supporting documents that substantiate why an increase is necessary. On the other hand, if less funds are needed, borrowers can request a reduction in the loan amount. If the loan request is denied, the applicant will be given up to six months in which to provide new information and submit a written request for reconsideration. The SBA is recommending that affected businesses apply as soon as possible even if they anticipate seeking financial aid from other sources.
During this surreal and incredible point in American history, small businesses around the country are facing a challenge they have never experienced. Now more than ever, small businesses, the lifeblood of the American economy, need some form of help to stay afloat and weather this storm. While the EIDLs and Emergency EIDL Grants will not save each and every business, they can at least serve as a lifeline that small businesses can use to try and overcome the tides of this global pandemic.