Understanding the SBA's Economic Injury Disaster Loans (EIDL) program for COVID-19 

Updated 3/24/21 from guidance originally published through 7/16/20

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.

Businesses can qualify for these 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.

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.  

- Per the updated application, types of eligible applicants include: 

• Businesses, agricultural enterprises, cooperatives, Employee Stock Ownership Plans (ESOPs), and tribal small business concerns with 500 or fewer employees
• Sole proprietors (with or without employees) and independent contractors
• Small businesses and agricultural cooperatives that have more than 500 employees but otherwise meet the SBA size standards
• Most private nonprofits, regardless of size

- 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

- 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.

- The SBA must find that applicants have an acceptable credit history.

- For loans made before Sept. 30, 2020, SBA has waived the usual EIDL requirements that recipient businesses must have been in business for a year before the disaster declaration (provided the business was in operation on Jan. 31, 2020), as well as the “credit elsewhere” provision. 

- Usage: Funds made available must be used for certain purposes. Acceptable purposes include working capital, paying fixed debts, payroll, accounts payable, and paying other bills that could have been paid had the disaster not occurred. It is NOT acceptable to use loans to replace lost sales, enhance profits, refinance long-term debt, or fund expansion opportunities. Also, EIDL funds cannot be used to cover expenses already covered by a PPP loan. (Read on for more on EIDL and PPP.)

- Loan limitations: 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) to continue to help struggling businesses. The amount of each loan is 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 will also consider potential contributions that are available from the business and/or its owner(s) or affiliates.

- Interest Rate: The interest rate for small businesses is 3.75% and for private nonprofit organizations is 2.75%.

- Maximum loan term: The maximum term is 30 years; however, terms are determined on a case-by-case basis based on each borrower’s ability to repay.

- Collateral: The SBA requires collateral for all loans over $25,000. Real estate is acceptable as collateral. SBA has said it will not decline a loan for lack of collateral, but it will require the borrower to pledge collateral that is available. 

• The CARES Act waived rules related to personal guarantees on advances and loans of not more than $200,000. 

- 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: In March 2021, SBA extended the deferral periods before borrowers have to make loan repayments as follows:

• For all SBA disaster loans made in 2020, the first payment due date is 24 months from the date of the note (extended from 12 months).
• For all SBA disaster loans made in 2021, the first payment due date is 18 months from the date of the note (extended from 12 months).
• SBA also granted an additional 12-month deferment of principal and interest payments for existing disaster loans approved prior to 2020 that were in regular servicing status as of March 1, 2020.

Application

- Online: The fastest way to apply is online at https://www.sba.gov/page/disaster-loan-applications

- Mail: Printed applications are available here.

Required documents

As listed on the application, the SBA will require the following documents to be submitted:

- The application (SBA Form 5), completed and signed.

- Tax Information Authorization (IRS Form 4506T) completed and signed by each applicant, each principal owning 20% or more of the applicant business, each general partner or managing member, and any owner who has greater than 50% ownership in an affiliate business. 

- Complete copies, including all schedules, of the most recent federal income tax returns for the applicant business; an explanation if not available 

- Personal Financial Statement (SBA Form 413) completed, signed, and dated by the applicant, each principal owning 20% or more of the applicant business, and each general partner or managing member 

- Schedule of Liabilities listing all fixed debts (SBA Form 2202 may be used)

Additional financial information may be required if requested, including:

- Complete copy, including all schedules, of the most recent federal income tax return for each principal owning 20% or more, each general partner or managing member, and each affiliate when any owner has more than 50% ownership in the affiliate business 

- If the most recent federal income tax return has not been filed, a year-end profit and loss statement and balance sheet for that tax year 

- Additional Filing Requirements (SBA Form 1368) providing monthly sales figures will generally be required when requesting an increase in the amount of economic injury.

Refinance of EIDL loans with PPP loan proceeds and lender remittance to SBA

According to an SBA Procedural Notice issued June 19:

- 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.

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}