As of mid-October 2020, the U.S. Small Business Administration (SBA) has approved 3,612,236 Economic Injury Disaster Loans (EIDL) totaling $191,994,805,796. Those numbers likely will rise as the application deadline for EIDL loans is not until December. If you’ve already applied, there is no need to reapply as applications are processed on a first-come, first-serve basis. Those fortunate small businesses that have already received their loan monies can rest easier, but the work may not be over. The SBA is still playing catch-up—accumulating all needed documentation, even after signed loan docs are submitted, and EIDL funds are received.
EIDL Loan Approved – Now What?
In case you haven’t applied for the EIDL program, let’s back up to see who is eligible to apply.
Under the CARES Act Funding Relief, small businesses affected by the coronavirus pandemic may apply for an EIDL loan of up to $2 million from the federal government through December 21, 2020. (EIDL Advance grants are no longer available). EIDL loans are issued directly from the U.S. Treasury. Businesses can apply directly through the SBA website.
While all business entity types are eligible to apply (independent contractors, sole proprietors, LLCs, S Corps, C Corps, and partnerships), businesses must have fewer than 500 employees. Most nonprofit companies are also eligible. Repayment is not required to start for one year from the funding date, the interest rate is 3.75% (for nonprofits, it is 2.75%), and terms are up to 30 years. Other specifics of the loan include:
- The loan must be used for fixed debts (rent, etc.), payroll, accounts payable, and other bills otherwise unpaid due to the disaster.
- EIDL loans less than $200,000 don’t require personal guarantees.
- There are no minimum requirements for how long the borrower has to be in business.
- There is no requirement that borrowers have to be unable to obtain credit from other sources.
- The loan can be used for payroll, but not for dividends, bonuses, disbursements to owners, repayment of stockholder/principal loans, expansion of facilities or acquisition of fixed assets, repairs, or replacement of physical damages, refinancing long-term debt, repaying loans, and relocation.
The SBA also lists the types of businesses and business owners not eligible for the EIDL loan program. Applicants that are not eligible include:
- Those engaged in illegal activity
- Those delinquent on child support payments
- Businesses making money from sexual products or services
- Gambling businesses
- Lobbying businesses
- State, local, or municipal government entities nor members of Congress
The online application requires a business to supply the following information:
- Business Legal Name
- “Doing Business As” name
- Federal Tax ID number or social security number
- Entity type (independent contractor, sole proprietor, LLC, S Corp, C Corp, or partnership)
- Gross revenues for the 12-months prior to the date of the disaster (January 31, 2020)
- Cost of goods sold for the 12-months prior to the date of the disaster (January 31, 2020)
- Rental properties (residential and commercial) only (lost rents due to the disaster)
- Nonprofit or agricultural enterprise cost of operation for the 12-month prior to the date of the disaster (January 31, 2020)
- Compensation from other sources received as a result of the disaster (such as the PPP)
- Primary business address (cannot be p.o. box), phone and email
- Date business established
- Date business purchased
- Business activity (detailed)
- Number of employees (as of January 31, 2020)
- Amount in U.S. Dollars of Estimated Loss
- Owners’ names and personal information, including birthdates, social security numbers, home addresses, and percentage of ownership
- Banking information (routing and account numbers)
Other Documentation Requirements
Depending on your type of business, the amount you want to borrow, and other factors, you may not have to provide any additional information to receive your funds. However, the SBA might ask for more support documents to approve your loan or, after the fact, when gathering information for repayment. At the very least, expect to provide your business’s last tax returns and a personal financial statement.
Suppose your business is a separate business entity, such as a C Corp or Limited Liability Company (LLC). In that case, the documents will be specific to ensure your company complies with state incorporation requirements. In any case, if you are asked to provide more support documentation, you should be prepared when the SBA asks. Other possible documents needed include:
- Current Profit and Loss (P&L) Statements
- Projected Financial Statements (prepare a one-year projection of income)
- Ownership and Affiliations (List of names and addresses of any subsidiaries and affiliates)
- Business Certificate/License/Permits
- Income Tax Returns (Business and Personal)
- Schedule of Liabilities (SBA Form 2202)
- Employer Quarterly Tax Form 941
- Corporation documents
- Statement of Good Standing with the state
- Articles of Incorporation (Articles of Organization for LLCs)
- Meeting minutes showing Board approved EIDL application
- A statement designating the person or persons by name and title authorized to sign the SBA loan closing documents
Read the Fine Print
Although there is no definite deadline for businesses to spend the EIDL, the SBA states the loan should be used for working capital until “normal” operations are reestablished. You can also request a loan increase within two years of your original EIDL if you experience additional hardships due to the disaster.
Also, for EIDL disbursements over $25,000, the SBA has specific collateral rules. Borrowers are prohibited from selling, transferring, or attaching future liens on the current collateral/assets such as equipment.
Other fine print stipulations to look out for are:
- Borrowers are required to itemize paid receipts, paid invoices, contracts, and all related paperwork for three years from the date of disbursement.
- Borrowers will “to the extent feasible, purchase only American-made equipment and products with the proceeds of this Loan.”
- Borrowers must keep all accounting records five years before the loan and three years after.
- Borrowers must agree to audits, if requested by the SBA, at the expense of the borrower.
- Borrowers may be asked to carry hazard insurance on collateral and key-man insurance.
Finally, in today’s uncertain economic climate, you are most likely concerned about your ability to pay back the loan—even with a year’s deferment. The SBA retains the right to file suit and take possession of collateral in the case of default. The loan agreement also states no individuals are personally liable for the loan, and the entity (the company) accepts the responsibility for the loan. However, in the case of sole proprietorships and independent contractors, when there’s no separation of business and personal finances, the liability must lie with the owners (although not explicitly stated as so).
The bottom line, the EIDL program, if you are approved, can make the difference between business resilience or failure, and the excellent terms are attractive. Like all loans, the key is to understand your responsibilities and risks before you sign.