Understanding SBA's Economic Injury Disaster Loans program

Updated September 27, 2021; new information in bold

The Small Business Administration’s (SBA’s) Economic Injury Disaster Loan (EIDL) program offers relief to eligible small businesses and nonprofits impacted by COVID-19, including charitable organizations such as churches and private universities.

After previously limiting the loans to $150,000, SBA announced in late March 2021 a new maximum loan amount of $500,000, effective April 6.

In September 2021, the limit was raised again to $2 million. The change was part of a set of policy updates that took effect Sept. 8, which also included new acceptable uses of the loan funds, an extension of the deferment period, and more. SBA said it would begin approving loans greater than $500,000 on Oct. 8, 2021.

SBA has announced that the last day that applications may be approved is Dec. 31, 2021 (or whenever funds run out, whichever is sooner), so interested businesses should file theirs as soon as possible to allow time for processing and approval.

Businesses can qualify for these COVID-19 disaster loans regardless of whether they have suffered property damage, and can use the funds to help meet working capital needs and cover operating expenses as they recover from the pandemic’s impact.

Read on for an overview of the EIDL program and how to qualify and apply, as well as what to know in cases where Paycheck Protection Program (PPP) proceeds must be used to refinance EIDLs. For more information, see SBA’s updated EIDL guidance as of Sept. 8, 2021.

ELIGIBILITY

• Your business must be experiencing a business loss related to COVID-19. The business receiving the loan must be deemed a Small Business based on North American Industrial Classification System (NAICS) code, annual receipts, and the average number of people employed per pay period. Learn more about the SBA’s size standards. 
• Types of eligible applicants include:
  • Businesses, agricultural enterprises, cooperatives, Employee Stock Ownership Plans (ESOPs), and tribal small business concerns with 500 or fewer employees (together with affiliates, where applicable)
  • Sole proprietors (with or without employees) and independent contractors with not more than 500 employees (together with affiliates)
  • Small businesses and certain agricultural enterprises that have more than 500 employees but otherwise meet the SBA size standards
  • Most private nonprofits, regardless of size
  • A business that, together with affiliates, has more than 500 employees; employs not more than 500 employees per physical location; has no more than 20 locations, including the number of any affiliates’ locations; and is assigned a NAICS code beginning with:
    • 61 Educational services
    • 71 Arts, entertainment, and recreation
    • 72 Accommodation and food services
    • 213 Support activities for mining; industry group
    • 3121 Beverage manufacturers
    • 315 Apparel manufacturing
    • 448 Clothing and clothing accessories stores
    • 451 Sporting good, hobby, book, and music stores
    • 481 Air transportation
    • 485 Transit and ground passenger transportation
    • 487 Scenic and sightseeing transportation
    • 511 Publishing industries (except internet)
    • 512 Motion picture and sound recording industries
    • 515 Broadcasting (except internet)
    • 532 Rental and leasing services
    • 812 Personal and laundry services
• Applicants must be able to prove their business was in operation on or before Jan. 31, 2020, and may be asked to provide documentation of that fact. Those that were not in operation on or before that date are not eligible. (SBA notes: “‘In operation’ includes businesses that were in an organizing stage but had not yet opened for business. Evidence that you were in an organizing stage includes, but is not limited to business licenses, contractual agreements, purchase orders for machinery and equipment, advertisements, and employment classified ads.”)
  • “Businesses that had more than a 50% change of ownership after Jan. 31, 2020, are ineligible unless the change in ownership involved a close family member or partner or the contract for sale existed prior to Jan. 31, 2020,” SBA’s September 2021 guidance states.
• According to SBA’s guide to size and affiliation rules, when calculating the size of your business, you must include the annual receipts and employees of your domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. Applicable affiliation rules from the guide include:
  • Affiliation exists when one business controls or has the power to control another or when a third party (or parties) controls or has the power to control both businesses.
  • Control can be established through ownership, management, or other relationships or interactions between the parties.
  • Both affirmative and negative controls are considered. Negative control includes when a minority shareholder has the ability under charter, by-laws, or a shareholder’s agreement to prevent a quorum or block action by the board of directors or shareholders
  • The September 2021 guidance states that for these COVID-19 EIDL loans, an affiliate is any business in which an applicant business:
    • Owns at least 50%; or
    • Has a right to profit distributions of at least 50%; or
    • Has the contractual authority to control the direction of the business. (“The affiliation will be determined as of any agreements in existence as of Jan. 31, 2020,” the guidance states.)
• As listed in the September 2021 guidance, ineligible entities include:
  • Entities that engaged in any illegal activities at the federal, state, or local level (including sale of marijuana/cannabis)
  • Loan packagers that earn more than one-third of gross annual revenue from packaging SBA loans
  • Entities that earn more than one-third of annual gross revenue from gambling
  • Entities engaged in multi-level sales distribution, lending, investment, or real estate development or investment (other than rental properties)
  • Entities primarily engaged in political or lobbying activities
  • Pawn shops that derived more than 50% of the previous year’s income from interest
  • Life insurance companies
  • Publicly owned nonprofit organizations other than tribal business concerns
  • Entities owned by a member of Congress
  • Entities that present live performances of a prurient sexual nature or derive income from the sale of related products or services
  • An entity where any owner of 50% or more of the entity is more than 60 days delinquent on child support obligations
  • Applicant or any 20% or more owners currently suspended or debarred from contracting with the federal government or receiving federal grants or loans
  • An entity where any 20% or more owner of the applicant:
    • Is currently incarcerated
    • Is presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction for any felony
    • Within the last five years, for any felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance, has 1) been convicted; 2) pleaded guilty; 3) pleaded nolo contendere; or 4) commenced any form of parole or probation (including probation before judgment)
    • In the past year, has been convicted of a felony committed during and in connection with a riot or civil disorder or other declared disaster
  • A business that operates as a franchise and is not listed on SBA’s Franchise Directory
  • An applicant business that received revenue or rental income in 2019 and did not file a 2019 federal tax return
  • Bankruptcy: See Page 9 of the SBA’s FAQ for details.
• Current SBA loans will not preclude an applicant from being eligible for Disaster Relief Loans; however, businesses need to be in good standing with the SBA. Applicants may not be eligible if they have not complied with the terms of previous SBA loans.
• A business can receive both a COVID-19 EIDL and another SBA disaster loan due to different disaster event, but cannot consolidate them or use the other loan to pay off the COVID-19 one. “If you qualify for another SBA disaster loan due to a different declared disaster in your area, the new loan must be used for the purposes listed in your loan closing documents, which may include working capital or physical damage repairs,” the September 2021 guidance states. “The terms and conditions of other disaster loans may be different than those of the COVID EIDL loan.”
• The SBA must find that applicants have an acceptable credit history.

USE OF FUNDS

• Funds can be used as working capital and to make regular payments for operating expenses – payroll, rent/mortgage, utilities, and other ordinary business expenses.
• As of SBA’s September 2021 guidance, borrowers can now use loan proceeds to “pay or pre-pay business non-federal debt incurred at any time (past or future), including monthly payments, payments of deferred interest,” as well as to pay regularly scheduled payments on federal debt. (“Borrowers with existing COVID-19 EIDL loans are able to use any available loan proceeds on these authorized uses of proceeds,” SBA noted.)
• However, proceeds still cannot be used to pre-pay debt owned by a federal agency (including SBA) or an SBIC.
• These funds can’t be used to expand the business or to start a new one.
• Also, EIDL funds cannot be used to cover expenses already covered by a PPP loan. (Read on for more on EIDL and PPP.)

MAXIMUM LOAN AMOUNT

• The statutory limit of SBA loans is $2 million. SBA set a maximum loan amount of $150,000 in May 2020 due to a high number of applications, but in March 2021 announced a new $500,000 limit (effective April 6). The amount of each loan was further limited to the economic injury determined by SBA after subtracting business interruption insurance and other capital recoveries up to the administrative lending limit; that limit was raised in March 2021 (effective April 6) from six months of economic injury to 24 months. The SBA said it would also consider potential contributions that are available from the business and/or its owner(s) or affiliates.
• As of the September 2021 guidance, an applicant’s maximum loan amount will be determined as follows, based on various business circumstances:
  • Loans up to $500,000: Maximum eligible loan amount is determined by a formula based on the date you began operations. “You will have the opportunity to choose your loan amount, which must be equal to or less than the maximum eligible loan amount calculated by SBA.”
    • Businesses in operation before Jan. 1, 2019: 2019 gross receipts or sales minus 2019 costs of goods sold multiplied by 2, or $500,000, whichever is less
    • Began operations partially through 2019 or 2020: SBA will calculate maximum eligible loan amount
  • Applicants using rental loss: SBA will calculate maximum eligible loan amount
  • “For loans greater than $500,000, SBA will underwrite your loan,” the FAQ states. “As part of its underwriting, SBA will perform a cash flow analysis for your business to confirm your business’s ability to repay the proposed COVID-19 EIDL loan as well as your business’s existing debt obligations.”
  • Businesses that are part of a single corporate group – defined in the FAQ as follows – may not receive more than $10 million in COVID-19 EIDL loans in the aggregate.
    • “You or your business has majority ownership, directly or indirectly, in any other business that has a different tax identification from your business
    • “Your business is majority owned, directly or indirectly, by a parent company that has a different tax identification number from yours”

LOAN TERMS

• Interest Rate: The interest rate for small businesses is 3.75% and for private nonprofit organizations is 2.75%.
• Loan term: The loan term is 30 years.
• Collateral and fees: The SBA requires collateral for all loans over $25,000. Real estate is acceptable as collateral. SBA has previously said it will not decline a loan for lack of collateral, but it will require the borrower to pledge collateral that is available. The September 2021 guidance explains:
  • “$25,001 – $500,000: Security agreement (UCC-1) lien required on business assets - A UCC filing is a legal notice that SBA will file with the Secretary of State to record a security interest against your business assets. SBA will charge a one-time $100 fee for filing the UCC-1 lien.
  • “$500,001 -$2,000,000: Security agreement (UCC-1) lien required on business assets and a best available mortgage on real estate owned by the applicant business. SBA will charge a one-time $100 fee for filing the UCC-1 lien. Additionally, the borrower will be responsible for recording the real estate lien and paying the associated fees.”
• Personal guaranty: The CARES Act waived rules related to personal guarantees on advances and loans of not more than $200,000.
  For loans of $200,001 or more, except for those granted to nonprofit organizations and ESOPs, all loans require a full personal guaranty from the following. (“If no single owner owns 20% or more, then at least one individual or entity must provide a full guaranty,” the SBA FAQ states.) The required individuals must sign Unconditional Personal Guaranties, and they must all be signed and returned to the SBA before the loan funds will be disbursed. SBA specifies in the FAQ that information on all 20% or more owners must be included on the application and at least 81% of the ownership must be accounted for, and cautions that refusal to provide a required guaranty is a basis for declining an application.   
  • All individuals or entities owning 20% or more of the applicant business
  • For sole proprietorships, the proprietor
  • For independent contractors, the contractor
  • For General Partnerships, all general partners
  • For Limited Partnerships, all general partners and any limited partner who owns 20% or more of the partnership
  • For Limited Liability Entities, the Managing Member and any member who owns 20% or more of the entity;
  • For Corporations, any individual or legal entity who owns 20% or more of the voting stock
• Economic injury: If applying for disaster declarations related to the coronavirus outbreak, only select “Economic Injury” when inquiring about your business losses.
• Loan deferral periods: As of the September 2021 updates, all new and existing COVID-19 EIDLs will have a deferment period of 24 months from origination. (Interest will accrue during that time.) There will be no penalty for prepayment.
• Sales: If an applicant sells their business after receiving the COVID-19 EIDL loan, it’s possible for someone to assume the loan, but “there are also circumstances where you would be required to repay the loan in full upon sale of your business,” SBA states in the September 2021 FAQ, with a note to see SBA SOP 50 52 for more information.

LOAN INCREASES

• Businesses that already received EIDLs but are now eligible for a higher amount can request an increase online by logging into their COVID EIDL portal account. “Do NOT apply for another loan or your application may be flagged as a fraudulent application,” SBA cautions.
• Businesses that already applied for and received a loan increase can apply for an additional one.
• “The amount of loan increase that you are eligible for is determined by the loan amount that you would be eligible for if you applied today minus the loan (including any increases) that you have already received,” SBA states. “…For example, if you are eligible for a $700,000 COVID EIDL loan today, but your current COVID EIDL loan is $500,000 (either because your maximum loan amount was capped in the past or because you elected to take less than the full amount), you are eligible to request an increase of $200,000.”
• The deferment period for any loan increase will be 24 months from the date the COVID-19 EIDL loan was first disbursed – not the date of the increase. For loans received in 2020 or 2021 that did not have a 24-month deferment period, SBA will reset the deferment period to 24 months from the disbursement date.
• See Page 14 of the September 2021 SBA guidance for details on collateral, fees, and personal guaranties related to loan increases.

APPLICATION and UNDERWRITING

• Online: The fastest way to apply is online at https://covid19relief.sba.gov/#/
• Underwriting: Per the September 2021 guidance:
  • For loans $500,000 or less, for for-profit businesses, a minimum credit score of 570 is required, and repayment ability will be determined by the owner’s credit score.
  • For loans greater than $500,000, a minimum credit score of 625 is required for for-profit businesses. The guidance states, “For loans greater than $500,000, SBA will underwrite your loan and provide you with an opportunity to choose your loan amount, which must be equal to or less than the maximum eligible loan amount calculated by SBA. As part of its underwriting, SBA will perform a cash flow analysis for your business to confirm your business’s ability to repay the proposed COVID EIDL loan as well as your business’s existing debt obligations.”

REQUIRED DOCUMENTS

• See Pages 9-10 of the September 2021 guidance for the latest information on documents that must be submitted for:
  • Businesses in operation before Jan. 1, 2020
  • Businesses that started operations on or between Jan. 1 and Jan. 31, 2020
  • Loans greater than $500,000
  • Plus, additional information that may be requested after the application is submitted

REFINANCE OF EIDL LOANS WITH PPP LOAN PROCEEDS AND LENDER REMITTANCE TO SBA

According to an SBA Procedural Notice issued June 19, 2020:

• An EIDL loan may not be refinanced with a PPP loan if the PPP borrower received the EIDL loan before Jan. 31, 2020, or after April 3, 2020.
• An EIDL loan may but is not required to be refinanced with a PPP loan if the PPP borrower received the EIDL funds from Jan. 31 through April 3, 2020, and used the PPP loan funds for purposes other than payroll costs.
• If the PPP borrower received the EIDL funds from Jan. 31 through April 3, 2020, and used them for payroll costs, the PPP loan must be used to refinance the full EIDL loan amount.

The Notice clarifies that the EIDL loan amount to be refinanced does not include the amount of any EIDL Advance the PPP Borrower received, because such advances do not need to be repaid.

For PPP loans where the lender application “Paycheck Protection Program Loan Guaranty” form included an amount for the “Refinance of Eligible Economic Injury Disaster Loan, net of Advance,” PPP lenders are instructed to disburse and remit loan proceeds used to refinance an EIDL loan directly to SBA, not to the PPP borrower.

“If the PPP Lender has already disbursed directly to the Borrower the loan proceeds allocated to refinance an EIDL loan, the PPP Lender is responsible for notifying the Borrower of the amount of PPP loan proceeds that must be remitted by the Borrower to SBA,” the Notice says.

Instructions are provided on how to electronically remit EIDL refinance payments to SBA, with a note that on the applicable form, the EIDL Loan Number, not the PPP loan number, must be entered in the SBA Loan Number field.

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