As small businesses continue to look into ways to cover their day-to-day business expenses, many are turning towards emergency financial resources.
The Economic Injury Disaster Loan is a pre-existing financial assistance loan administered by the U.S. Small Business Administration (SBA). With the passing of the Coronavirus Preparedness and Response Supplemental Appropriations Act and the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the declaration of COVID-19 as a disaster opened the doors for the SBA to make more EIDLs available for more small businesses impacted by the pandemic.
In the past it had been primarily used to help businesses, nonprofit organizations, homeowners, and renters repair or replace property damaged or destroyed in a federally declared disaster, and usually only when other lending resources had been exhausted.
Here is some need-to-know information regarding how this loan can help your business during this tough time.
What Can I Use the Loan For and How Much Is It For?
The EIDL is a direct loan from SBA Disaster Assistance that has been made available to businesses impacted by the novel coronavirus pandemic. One of the benefits of this loan is the flexibility in use in comparison to the Paycheck Protection Program (PPP) loan. An EIDL can be used to provide paid sick leave, it can help businesses manage increased production costs due to the pandemic, or even pay select business obligations including rent and mortgage payments. This is in addition to bills that could have been paid if the disaster had not occurred.
This is especially beneficial as businesses are able to receive both the SBA’s Economic Injury Disaster Loans (EIDL) and Paycheck Protection loans, so long as they don’t go toward the same expenses. In addition, businesses can apply for both programs without the requirement of accepting anything that’s offered.
The loan can provide up to $2 million in disaster funds for up to a 30-year term. As part of the CARES act, small businesses and nonprofits who apply for the loan may also request an emergency grant advance of up to $10,000. Similar to the PPP loan, the EIDL advance can eventually be forgiven.
It is important to note that the small business loan amount is decided by SBA and based on the small business’s ability to repay the loan credit. Fixed rates for those seeking the emergency EIDL funds due to COVID-19 have also been lowered to 3.75% for businesses and 2.75% for non-profits.
There is no fee to apply for either loan and you can turn the loan down if you decide it’s not what you want.
Does My Business Qualify For the Loan?
Similar to the Payment Protection loan, EIDLs are open to any business with 500 or fewer employees. The employee count includes all full-time, part-time, independent contractors, and any other status employees.
To qualify for the business loan, your business must also meet the SBA definition of a small business. This includes:
- Small businesses or non-profit 501(c)(3) organizations with 500 or fewer employees
- Small businesses, 501(c)(3) veteran’s organizations, or tribal concerns that meet the SBA size standards
- An individual who operates as a sole proprietor or independent contractor
- An individual who is self-employed who regularly carries on any trade or business
- Businesses in the food or hospitality industry (NAICS codes beginning in (72) may be eligible on a per-location basis)
- Most private nonprofits
Qualifications are simple, with a few differences from the PPP loan.
- Must be operating your business within the United States
- You must also have been in operation before and by January 31st.
- Have had employees you covered salaries and payroll taxes for on a full-time, part-time, or another basis. You can also have paid independent contractors.
- Not have any existing debt obligations to the government
- Must be willing to allow the SBA to review tax returns
- Must show economic injury due to coronavirus (COVID-19), not other factors.
- For loans over $25,000, collateral is needed in the form of a general security interest in business assets that will be used for collateral instead of real estate
- For loans of $200,000 and over a personal guarantee is needed.
How Can I Apply for an Economic Injury Disaster Loan?
Small businesses can apply immediately through the SBA disaster assistance portal.
The EIDL has an application deadline of December 21, 2020. The grant is part of the EIDL application and can be requested when applying, with reports that businesses should expect to receive the grant within three business days.
While preparing an application for the EIDL loan, businesses have to fully evaluate their business needs and pay close attention to how they can build a strong application. Below are some things to keep in mind when gathering information.
Showcase your credit history positively.
This includes your time in business, credit score, financial reputation. Documents to have on hand are:
- Complete copies, including all schedules, of the most recent Federal income tax returns for the applicant business; an explanation if not available
- Schedule of Liabilities listing all fixed debts (SBA Form 2202)
- Monthly Sales Figures (SBA Form 1368)
- Personal Financial Statement (SBA Form 912) completed, signed, and dated by the applicant, each principal owning 20 percent or more of the applicant business, and each general partner or managing member
Provide evidence of your ability to invest funds and repay the loan.
Cash flow is an important factor for lenders when reviewing applications and so is your ability to pay back. This can also affect the amount you get approved for. Everything from previous debt to how and where you’ve invested funds in the past can heavily impact how much cash you have on hand to pay back the loan. A few tips to keep in mind:
- Showcase successes in how you have invested capital into your company. Let lenders know that the funds you receive will bring back returns, which will ultimately allow you to pay back the loan within the allotted time frame.
- Pull together documentation on your business’s payroll, mortgage, rent, and utility payments for the previous 12-month period to highlight your history.
- Be sure to have your most recent IRS Form 941—Employer’s Quarterly Federal Income Tax Return.
- Get a copy of your complete 2019 financials, including your business’s profit/loss and balance sheet.
For many small businesses, meeting the loan qualifications will not be difficult. Keep in mind this information is based on our current understanding of the program. You can learn more about this and other relief programs directly from the Small Business Administration website: SBA Coronavirus Relief Options. Changes can happen as more applications are being processed by the SBA and we highly encourage you to consult with your lawyers, CPAs, and Financial Advisors.
In the meantime, be sure to look into additional ways to immediately reduce costs and increase savings. If you have any questions on how our team can help you quickly save on credit card processing fees, reach out to Stax today. We will be happy to answer your questions and help see how we can best support your business.