The U.S Small Business Administration (SBA) announced changes to the Economic Injury Disaster Loan (EIDL) program. Effective September 8, 2021, small businesses can apply for support until December 31 or deplete the available funds. Furthermore, small businesses can borrow up to $2 million and update existing funds to cope with COVID-related financial disruptions.
What Are The Key Changes To the EIDL Program?
The SBA released the Interim Final Rule to implement the changes to the Disaster Loan Program. These changes apply to all applications submitted on or after September 8 or COVID EIDL applications submitted before but approved on or after September 8.
- The loan cap has been increased: The SBA has increased the loan cap from $500,000 to $2 million. Businesses that also applied for a loan before the changes can also apply for a loan increase. In addition, businesses under a single corporate group can apply for up to $10 million.
- Interest: The interest rate for for-profit small businesses is 3.75% and 2.75% for nonprofit organizations over 30 years.
- Amortization: While the amortization period is fixed, businesses can now defer payments for the first 24 months from the original closing date. During this period, interest and payments shall accrue. The borrower shall then make loan prepayments over the next 28 years. Fortunately, there are no prepayment fees or penalties.
- Use of funds: The SBA has expanded the use of funds for expenditures and debts. For example, working capital, rent, maintenance, commercial debt, federal business debt, cards, payroll, and healthcare benefits. However, small businesses cannot use the funds to expand their business.
- Amount: For businesses requesting $500,000 or less, the SBA considers if the business was operational before January 2019. In its calculation, the SBA considers double the business’s 2019 gross revenue and subtracts the cost of goods in 2019 to find the loan amount.
For loans above $500,000, the SBA will calculate the loan amount and conduct a cash flow analysis.
- Exclusivity Period: From September 8, 2021, the SBA started accepting loan applications. Loan approvals are underway for loans below $500,000. Other loans will be disbursed from October 8, 2021. The thirty-day exclusivity period (September 8 to October 8) ensures that the smallest businesses access relief first.
The SBA is also optimistic about reviewing loan applications above $500,000 within six weeks to expedite the fund distribution. Businesses can also apply for extra fund amounts, but they should prepare for a long waiting period, approximately nine months, if the first loan is below $500,000 and the second above $500,000.
- Guaranty: No personal guaranty is required for loans below $200,000. A personal guaranty from all individuals and entities that own more than 20% of the business is required for loans above this amount. The same rule applies to corporations and partnerships where an individual or an entity owns more than 20%.
If no one owns more than 20% of the business, at least one person must provide a full guaranty. Sole proprietors, independent contractors should also provide a personal guaranty. For general partnerships and limited liability partnerships, all partners should provide a personal guarantee.
- Collateral: You do not require collateral for loans below $25,000. However, for loans above this amount, the SBA uses business assets such as furniture, fixtures, equipment, and machinery. Also, if you qualify for a $2 million loan but only have $500,000 collateral, you don’t have to fund the collateral gap.
In addition, if your business owns real estate and qualifies for more than $500,000, the real estate and property should be listed as collateral.
- Loan forgiving: EIDL loans are not forgivable. However, businesses can also apply for advances under the COVID EIDL program. Fortunately, businesses do not have to repay these advances.
- Fees: There are no application fees for loans below $25,000. However, for loans greater than $25,000, there is a one-time $100 fee. A one-time $100 fee for loans above $500,000 also applies when the SBA accepts real estate as collateral. The applicant shall also cover any associated costs with recording the real estate lien.
EIDL Program Background
The COVID EIDL program provides businesses with relief funds to alleviate the adverse effects of the pandemic. The fund aims to provide working capital and operating expenses to help keep small businesses afloat.
EIDL loans are different from other disaster recovery loans. This program allows the SBA to provide low-interest, fixed-rate, and long-term loans for small businesses to help them recover from the effects of the pandemic. The relief ends on December 31, 2021, or when the funds deplete, or whichever comes first.
The funds come at a critical time following a report by Goldman Sachs that shows 44% of small businesses have less than three months of cash reserves. As such, small businesses are likely to collapse if another COVID-related emergency should arise.
The research further revealed that the pandemic affected small businesses disproportionately. More than 51% of black-owned small businesses have less than three months of cash reserves.
Keep in mind that businesses cannot specify the loan amount. Enterprises can send their applications, but the SBA calculates the loan amount based on the economic injury. Economic injury is the change in the financial situation of a small business because of an effect of a disaster. In this case, the economic injury funds, EIDL, are being distributed following the COVID pandemic.
Am I Eligible for COVID EIDL Funds?
- A small business qualifies if it has less than 500 employees. This includes businesses and their affiliates. However, the business must not have more than 20 locations.
- Agricultural enterprises qualify if they have less than 500 employees.
- An individual or sole proprietorship that operates without staff or as an independent contractor.
- A corporative and its affiliates with any, with less than 500 employees.
- A small tribal business with less than 500 employees.
- An affiliate can apply for the loan if the qualifying entity has an equity interest or profit share of 50% and above.
Applicants must show “substantial economic injury” caused by the pandemic. The injury includes events that cause the small business:
- Be unable to meet its obligations as it matures
- Fail to pay its operating expenses
- Market or produce services as marketed
The fund further emphasizes support to hard-hit industries. These include:
- Accommodation and food services
- Apparel manufacturing
- Arts, entertainment, and fitness facilities
- Clothing and clothing accessory stores
- Educational services
- Non-internet broadcasting
- Non-internet publishing services
- Personal laundry services
- Rental and leasing services
- Site seeing and scenic transportation
- Sporting goods, books, and music stores
- Transit and ground transportation
Who Is Not Eligible For COVID EIDL Loans?
- Small businesses that were not in business before January 31, 2020
- Businesses that do not meet the program’s size limitations. Employees are capped at 500 and 20 for physical locations for companies with multiple locations and affiliates.
- Businesses engaged in illegal activity at the federal or state level.
What Can I Use The EIDL Funds For?
If you have applied and qualified for the EIDL funds, you need to channel the money to allowable uses. Many business owners are concerned about spending the funds incorrectly. Generally, it’s best to have a strong accounting program to track your spending for business visibility and future scrutiny by government agencies.
Businesses have both to-date and future expenses. Usually, to-date expenses are reported as liabilities in the accounting books and which a business cannot fulfill due to the pandemic. In this case, the business can use the EIDL funds to pay debts and bring the working capital to normal levels.
Future expenses are business needs the entity cannot fulfill throughout the injury period. This refers to payments such as fixed debt payments and fixed payments such as rent, insurance, and utilities. In addition, businesses can use the funds to pay commercial debt such as credit card debts, lease payments and mortgage payments, and federal debt, including payments to the SBA. Debt payments can include monthly installments, prepayments, and deferred interest.
What Can’t I Use EIDL Funds For?
- The payment of dividends and bonuses.
- Payments to directors, partners, directors, stockholders, and officers.
- Payment of stockholder or principal loans except when non-payment would result in hardship to the stockholder and when the stockholder injected the fund due to the disaster.
- Expanding the business and acquiring fixed assets.
- Repair physical damage to the business.
- Payment for relocation.
- Penalties for non-compliance with laws.
How to Apply
If you have already applied for a loan with the SBA, sign into your portal and find Form 4506-T to apply for the new revised loans. New applicants can submit the same form by visiting here. In addition, applicants should be ready to release tax forms to the SBA for revenue verification.
How to Make the Best Use of EIDL Funds
As a small business owner, it’s crucial to apply for the EIDL funds to recover from the COVID pandemic. However, once your loan is approved, the next step begins- spending the funds. Therefore, it’s essential to plan your finances and account for all the spending for compliance reasons.
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