What is an EIDL loan?

Disaster loans from the Small Business Administration (SBA) are the most common federal aid for non-farm, private-sector disaster losses. The disaster loan program is the only SBA aid program that does not include just small businesses. 

SBA disaster loans have been available for years, but government officials signed the Economic Injury Disaster Loan Program (EIDL) into law in March 2020 as part of the CARES Act. Congress passed this act to provide urgent assistance to American workers and small businesses devastated by COVID-19. 

Regardless of whether the applicant experienced physical damage, EIDL loans can give up to $2 million in financial assistance to small businesses or private, non profit organizations that suffer significant economic injury as a result of a declared disaster. These loans boast low-interest rates and a 30-year repayment schedule, making them ideal for struggling small businesses. 

An EIDL can assist you in meeting financial responsibilities that your company or nonprofit organization would have been able to meet if the disaster had not occurred. It protects you from the direct economic damage caused by the disaster and allows you to retain a decent  operating capital position during the disaster period. EIDLs don't make up for lost revenue or sales.

To qualify for EIDL support, small enterprises or private nonprofit organizations must have suffered economic loss and be located in a disaster-affected or neighboring county.

SBA EIDL Loan Basics

Before taking out an EIDL loan, it is best to understand the loan terms and conditions. 

• The loans are for 30 years

The interest rate on all EIDL loans is 3.75 percent for small businesses and 2.75 percent for nonprofits for up to 30 years. Loans are automatically put on hold for the first year, so payments will start a year following the initial loan.

• There is a limit on how much you can borrow

The SBA has reduced the maximum loan amount to $150,000—on top of any advance your company qualifies for—due to high demand for the EIDL. It's worth noting that the SBA later increased the limit for qualified businesses to $500,000 and then to $2 million.

• Collateral Requirement

If you apply for a loan from the EIDL for more than $25,000, you'll have to put up business collateral to secure the loan. Assets like goods and equipment, or intangible assets such as trademarks and copyrights, can be used as collateral.

• EIDL Advance

Those that apply for the EIDL can receive a $10,000 advance as part of the program. The loan administrators initially calculated the advance amount depending on the number of employees in the company. They gave $1,000 per employee for up to ten employees ($10,000). However, Congress eventually authorized Targeted EIDL Advances of up to $10,000 for certain hardest-hit enterprises, with an additional $5,000 for the worst-affected.

• Change of business structure

EIDL loan borrowers cannot change their business structure while the loan is due. For the duration of the loan, your business structure must remain the same. For example, you’ll need SBA permission first if you want to modify your business structure from a sole proprietorship to an S corporation. 

Do you qualify for an SBA disaster loan?

Because the eligibility criteria are relatively broad, your company is likely to qualify if it is classified as one of the following:

• A company

• An agriculture business

• A sole proprietorship or an independent contractor (a person who owns and operates their own business)

• A small tribe-owned enterprise

• A non-governmental agency or entity that a private nonprofit organization runs

The Small Business Administration will conduct a routine credit check to ensure you meet the SBA's credit score requirements to qualify for an EIDL loan. Lenders assume a risk when they lend money, and credit checks help them make informed decisions to mitigate those risks. 

Even if you have bad credit or a poor small business credit score, the SBA will consider other factors while determining whether or not you qualify for an SBA disaster loan. These factors include current income, rent, utility, insurance, and other payment histories.

You must employ less than 500 people. The 500-employee limit applies to all businesses that are SBA disaster loan qualified. Several exceptions include a company with more than 500 employees that meets the SBA's Size Standards.

Ways You Can and Can't Use Your EIDL Loan.

Economic injury can take the form of reduced working capital, higher expenses, a cash imbalance due to frozen goods or receivables, and accelerated debt, just to name a few. You may only use funds from an EIDL loan for working capital and expenses necessary to mitigate the specific economic injury, including:

• Employee health-care benefits

• Payroll

• Payment of fixed debts

• Utilities 

• Rent

You cannot use EIDL funds for a variety of expenses, including: 

• New debt refinancing

• Purchasing capital assets, new buildings, or cars

• Payment of old debts (exception for COVID-19 EIDL loans)

• Payment of dividends and bonuses

• Cost of a direct federal debt except for IRS debts

EIDL Loans and Grants vs. PPP Loans for Small Businesses 

Small businesses affected by Covid-19 can apply for EIDL loans and Paycheck Protection Program (PPP) loans. The Small Business Administration (SBA) will provide the loans under the CARES Act, which provides $377 billion in emergency assistance money to small businesses in the United States. 

You can apply for and receive loans from the EIDL and PPP programs if you meet the eligibility requirements and plan to use the loan funds according to each set of guidelines. Previously, any funds obtained through an EIDL grant will reduce the amount of your forgiven PPP debt. Now you can no longer apply for both an EIDL grant and a PPP loan without incurring any fees.

PPP loans give small businesses up to 2.5 times their average monthly salary with a max of $10 million. Your payroll expenses determine the amount that you are eligible for. They are eligible for debt forgiveness provided they can satisfy the SBA’s loan forgiveness guidelines.  

PPP loans can be used for operating expenses, although their primary function is to fund eight weeks' worth of salaries. You must spend at least 60% of the loan on payroll expenses to qualify for forgiveness. A portion of the loan can also pay for your mortgage, rent, or utility bills. The remaining 40% of the funds can cover software expenses, property damage from civil unrest, supplier costs, and worker protection. 

EIDLs provide advances up to $10,000 that businesses do not need to repay. They help cover up to six months of operating costs, but you will have to repay the money at some point, unlike the PPP loan. However, the EIDL program allows you to apply for an EIDL grant. Grants don’t need to be repaid and can award up to $1,000 per employee with a max of $10,000.

The SBA collaborates with various organizations to provide small businesses with federal financial aid and community resources. Grants are only available to carry out a government-authorized purpose, not to start or expand a business.

For economic development, grants are only available to small firms in specialized industries, such as NGOs, educational institutions, and state and local governments. These grants are not free money, and the recipient is usually required to match funds or combine the gift with other funding sources.

Bottom Line

EIDL loans are great options for small businesses that experienced difficulties due to the Covid-19 pandemic. They can help cover up to six months’ worth of operating expenses, have a low interest rate, and can be repaid over 30 years. If you apply, the SBA will pull your credit to check your score. This credit pull may lower your score by a few points, so it's something to keep in mind if you're trying to improve your credit. However, if you make your monthly payments promptly, you may improve your credit in the long run. These loans are comparable to PPP loans, though each has its own set of criteria and eligibility. 

Regardless of which option you pursue, your small business has a variety of financing options available during financial hardships! Equify Financial is here to support your business throughout the process and decide which option is best for you. Equify offers financing options that may serve as an alternative to EIDL or PPP loans. Talk to our team of seasoned financial experts to explore your options today! 

Sources

https://www.govloans.gov/loans/economic-injury-disaster-loans/ 

https://www.nav.com/blog/what-are-the-eidl-loan-requirements-600410/

https://getdivvy.com/blog/sba-disaster-loan-requirements/