Cash is king, especially during the worst recession since the 1930s.
The hugely popular federal Paycheck Protection Program (PPP) that paid forgivable loans to millions of businesses ended on August 8.
PPP loans could return in revamped form if Congress passes a new stimulus bill.
But another source of relatively cheap money is available right now: the Economic Injury Disaster Loan (EIDL) program administered by the Small Business Administration (SBA).
You can apply for an EIDL even if you have already obtained a PPP loan. But you may not use an EIDL to pay the same payroll costs or other expenses you pay with a PPP loan.
If PPP loans were the lending equivalent of a Tesla, EIDLs are more like a Toyota Corolla: kind of boring and old fashioned, but they’ll get you there. EIDLs have been around since 1953 to help businesses deal with economic losses caused by local disasters such as hurricanes, fires, and tornados.
When Congress enacted the CARES Act, it made EIDLs available to businesses in all 50 states that are impacted by the nationwide COVID-19 pandemic, and it loosened the eligibility rules.
EIDL Emergency Advance
Congress also established and funded a new EIDL emergency advance program that gave EIDL applicants loan advances of $1,000 per employee, up to $10,000.
The advances are actually grants—they need not be paid back. If you obtained both a PPP loan and an EIDL advance, your bank must deduct the advance amount from your PPP loan forgiveness.
The SBA ended the EIDL emergency advance program on July 11, when the $20 billion appropriated by Congress ran out (although Congress could create new funding for the advances).
If you obtained an EIDL advance, you are not required to apply for or accept a full EIDL. If you decide not to apply for the full EIDL, you should send the SBA an email informing them of your decision. Send it to disastercustomerservice@SBA.gov.
Otherwise, you may get a call from the SBA. If you do apply for an EIDL, your advance is deducted from the loan amount. No matter what you do, you need not repay the advance.
Regular EIDLs, the subject of this article, are still available through the end of 2020.9 As of August 8, the SBA had approved 3,353,064 EIDLs for a total of more than $178 billion.
Who Is Eligible?
Your business is eligible for an EIDL if it suffered “substantial economic injury” due to the COVID-19 pandemic. You qualify if your business is unable to pay its normal operating expenses and other bills or to sell or produce its goods or services. There is no requirement that your business revenue decline by any specific amount.
Also, your business must have fewer than 500 employees. Sole proprietors and independent contractors with no employees are eligible, as are non-profits. But you’re out of luck if your business involves lobbying or gambling or is sex-related.
Your business need not have been in existence for more than one year, but it must have been in operation on January 31, 2020.
How to Apply:
Unlike with PPP loans, you apply for an EIDL directly from the SBA, not a bank, and are paid from the U.S. Treasury. You can apply online at the SBA website.
There is no cost to apply. The SBA created a streamlined application for these loans. The SBA may approve an applicant based solely on its credit score and not even require a copy of the applicant’s tax return. Many applicants have their loans approved without any interaction with an SBA loan officer.
How Much Can You Borrow?
The law allows the SBA to issue EIDLs up to $2 million.16 But the agency is reportedly capping EIDLs at $150,000.
An EIDL is intended to cover six months of your business’s operational expenses. For most small businesses, the loan amount is based on gross revenues minus cost of goods sold (COGS) during the period from February 1, 2019, through January 31, 2020, divided by two.
Example. If you have $300,000 in gross revenue and $150,000 COGS, you’re eligible for a $75,000 EIDL.
Service businesses that don’t have a cost of goods sold should enter “0” in the COGS line in the loan application.
What Are the Loan Terms?
Unlike PPP loans, EIDLs are not forgivable—you must repay the entire loan. But the terms are highly favorable.
These are 30-year loans at a 3.75 percent interest rate (2.75 percent for non-profits). The 30-year term is much longer than typical for commercial loans and results in lower monthly payments.
You don’t have to make any payments until one year after you receive the loan (interest continues to accrue during the one-year delay). There is no prepayment penalty.
The SBA does not require that the owners of a business sign a separate personal guarantee for EIDLs under $200,000. Only the business—the entity that borrows the money—is liable for paying back the loan.
Example. Your business is an S corporation, in which you’re the sole shareholder. Your corporation (not you personally) takes out an EIDL for $150,000. As president, you sign the EIDL agreement on your corporation’s behalf. Your corporation is liable for the loan, but your personal assets are not at risk.
But if you’re a sole proprietor, you must personally sign the loan agreement, and you will be personally liable for the loan. This is the case whenever you borrow money for your business as a sole proprietor—there is no separate legal entity insulating you from personal liability for the loan.
The SBA does not require any collateral for EIDLs under $25,000.
For loans over $25,000, the SBA obtains a security interest in all tangible and intangible property the borrower owns or acquires, including inventory, equipment, and receivables. The SBA files a UCC-1 lien against your business. This is a standard requirement for commercial loans.
How Can You Use the Money?
EIDLs can be used for a wider range of expenses than PPP loans, which must be used primarily (60 percent) for payroll in order to be forgivable. You don’t necessarily have to use an EIDL for payroll at all.
You use your EIDL as working capital to carry on your business until normal operations resume and to pay for expenses necessary to alleviate the economic injury caused by the COVID-19 pandemic. This includes paying for a wide array of normal operating expenses, such as employee health care benefits, rent, utilities, and fixed debt payments.
You may not use an EIDL to replace lost sales, fund business expansion, or start a new business. In particular, SBA regulations and procedures prohibit you from using EIDL proceeds for
- payment of any dividends or bonuses;
- disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the business;
- repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster, and non-repayment would cause undue hardship to the stockholder/principal;
- expansion of facilities, or acquisition of fixed assets;
- repair of or replacement because of physical damage;
- refinancing long-term debt;
- paying down (including regular installment payments) or paying off loans provided by or owed to another federal agency (including SBA loans);
- payment of any part of a direct federal debt (including SBA loans) except IRS obligations;
- payment of any penalty resulting from non-compliance with a law, regulation, or order of any
- government agency;
- contractor malfeasance; or
Example. A restaurant obtains the maximum $150,000 EIDL. It can use the money to pay its employees’ salaries and benefits, rent, utilities, and insurance and to pay for food and other supplies. It can also use the loan to pay off its business credit cards (short-term debt), but not a bank loan (long-term debt). It cannot use the loan to purchase, say, a food truck to expand its business (acquisition of fixed assets). Nor can it use the loan to pay distributions to its owners or investors (except to pay off emergency shareholder/owner loans).
If you’re a sole proprietor, an LLC member, or a partner in a partnership, you may use EIDL proceeds to pay yourself an owner’s draw for work you actually perform for the business, provided that the draw is normal and essential.
If your business is a corporation and you work as its employee, the EIDL may fund your employee salary. But you may not use the EIDL to pay yourself corporate dividends or other corporate distributions. Thus, if your business is an S corporation, you can’t use the loan to pay yourself corporate distributions that are not subject to employment tax.
When you obtain an EIDL, you become subject to many other restrictions and requirements that we discuss in Seven Things to Know Before You Take Out an EIDL.
If your business is suffering due to the COVID-19 pandemic and you need a quick cash infusion, you should consider applying for an EIDL from the SBA. This article gives you an overview of the EIDL program.
Here are some highlights from the article:
- EIDLs are available to almost any business with fewer than 500 employees that has suffered economic losses due to the COVID-19 pandemic.
- You can borrow up to $150,000, but the exact amount is based on your anticipated losses.
- You can get an EIDL even if you already received a PPP loan.
- You can’t pay for the same expenses with an EIDL and a PPP loan.
- EIDLs are not forgivable, but you have 30 years to pay them back at 3.75 percent interest.
- You may use EIDL proceeds only as working capital to pay normal operating expenses during the pandemic.