Is an Economic Injury Disaster Loan Right For You?

08/02/2020

By Richard Tower and Janna Rust and Karen Blacik and Karen Gries – CliftonLarsonAllen Email

Key insights

  • When PPP funds run out, EIDL loans serve as another viable option for small businesses and other organizations.
  • The EIDL program provides an opportunity for other types of 501(c) organizations to obtain critical funding resources.
  • If you’re interested in an EIDL loan, the SBA’s online application process is designed to be easy and quick via their portal.
  • CLA can help you review your EIDL options, as well as other funding possibilities.

Small businesses and nonprofit organizations across the country still seek financial assistance to deal with the economic ripple effects of the COVID-19 pandemic. When Paycheck Protection Program (PPP) funds run out, what should you do? One option might be the pandemic-modified Economic Injury Disaster Loan (EIDL) program. Before you decide to apply, read the fine print.

EIDL program basics

Throughout its history, the SBA’s EIDL program has provided funds to organizations during federally declared disasters. The basic terms included up to $2 million dollars in loans issued directly by the SBA for a term up to thirty years at an interest rate not to exceed 4%. The COVID-19 national emergency increased the popularity of EIDL as a second vehicle — alongside the newly created PPP — to create access to needed capital. (Learn more about the differences between the two programs here.)

Because the current crisis doesn’t directly align with the EIDL program structure, the CARES Act waived certain restrictions and other requirements normally applicable to EIDLs, including:

  • A personal guarantee of EIDLs up to $200,000.
  • A borrower to be in business for at least a year (the CARES Act does, however, require that borrowers be in operation on January 31, 2020).

Presently, the SBA has limited funding to a maximum of $150,000 to help accommodate the large volume of loan requests received.

In addition to loans, an emergency grant of $10,000 (which was then amended to “up to $10,000 based on number of employees”) was initially available to any eligible organization that applied for an EIDL, but was discontinued effective July 11, 2020, due to the exhaustion of funding allocation.

Ultimately, individual loan amounts under the EIDL program are determined based on the projected revenue loss an organization might suffer as a result of a disaster. Because projected revenue losses are more difficult to determine in the current pandemic than in a natural disaster — which the EIDL program has typically been used for — uncertainty exists around what loan size an organization may actually be eligible for when they apply.

While PPP funding provided opportunities to many small businesses and nonprofits, it was limited to 501(c)(3) and (c)(19) organizations. In contrast, the EIDL program provides other types of 501(c) organizations, like associations and social welfare organizations, the opportunity to pursue EIDL resources and obtain critical funding.

How to apply for an EIDL

If you decide an EIDL is right for your organization, visit the SBA’s online application portal for a walk-through of eligibility requirements and certifications. The EIDL application process is designed to be easy and quick via the portal.

Note that SBA affiliation rules and size standards apply when determining eligibility.

The EIDL application process

The SBA has adjusted the application process over the past few months to handle the increase in applications more effectively. Currently, the process uses an initial online application that is reviewed by the SBA and is followed up by a request for supplemental information.

Step 1: Initial online application — The initial form gathers basic information about the organization. Keep in mind that the form is “smart” — it validates data for proper format and unless all fields are filled out appropriately, you cannot advance to the next page. Key information requested includes:

  • Gross revenues for the past 12 months through January 31, 2020.
  • Cost of goods sold for the past 12 months through January 31, 2020.
  • General business information: TIN, business name and address, number of employees as of January 31, 2020, as well as nature of business.
  • Ownership information: Business or personal owner? Applicants must provide general information such as ownership percentage and social security number or tax ID for each owner with 20% or more interest.
  • Questions related to criminal record and your ability to contract with the federal government.
  • Applicant information, whether it be you or a third party.
  • Bank account and routing information.
  • Certification that all information is truthful.
  • Certification that additional information will be provided upon request.

Once the application is submitted, you will be given an application number to use for correspondence with the SBA. An email address and phone number is also provided to check on the application. Throughout the process, you or your main point of contact will receive loan status updates from the SBA via email, as well as any requests for additional information.

Step 2: Follow-up request — Next, the SBA will email your loan application number and a request to set up an account on their online portal. You may be asked to provide the following information (however, at this time, the information below has not been required for all applicants):

  • SBA Form 1368: Monthly sales figures beginning three years prior to the disaster and (optional) anticipated forecast for period of the disaster
  • SBA Form 2202 : Schedule of Liabilities
  • IRS Form 4506-T: Request for Transcript of Tax Return
  • SBA Form 413: Personal Financial Statement
  • IRS Form 8821: Tax Information Authorization
  • Most recent historical financial statements

Step 3: Review loan documents — Once you’ve successfully created an account on the SBA portal and your loan is approved, you’ll receive another notification along with the actual loan documents. Carefully review all of the loan provisions. While EIDL proceeds can be used for all types of working capital — as opposed to the limited allowances in the PPP — there are some restrictions to consider before you sign on the “dotted line.”

For instance, loan proceeds cannot be used to:

  • Refinance long-term debt.
  • Pay off other SBA loans.
  • Purchase fixed assets (property, plant, equipment).
  • Repair property.
  • Pay dividends or distributions to owners or partners.
  • Pay bonuses.

In addition, language commonly seen on EIDL agreements includes further restrictions that may remain in place for as long as any portion of the loan is outstanding:

LIMITS ON DISTRIBUTION OF ASSETS: Borrower will not, without the prior written consent of SBA, make any distribution of Borrower’s assets, or give any preferential treatment, make any advance, directly or indirectly, by way of loan, gift, bonus, or otherwise, to any owner or partner or any of its employees, or to any company directly or indirectly controlling or affiliated with or controlled by Borrower, or any other company

4. Before signing, consider your total financial situation — If you are comfortable with the loan restrictions, take stock of all federal monies you have received before you sign the documents. The EIDL is subject to single audit requirements that are placed upon any organizations that use more than $750,000 in one year.