A Second Look at the EIDL Program

June 23, 2020 | Article

Economic Injury Disaster Loan (EIDL) assistance is an existing Small Business Administration (SBA) program enhanced by the CARES Act in order to help small businesses affected by the COVID-19 pandemic.

While the Paycheck Protection Program (PPP) has garnered most of small business owner’s attention over the last few months, the EIDL program could be attractive for any small business looking for additional assistance. Many small businesses that at first turned away from EIDL assistance in order to focus on a PPP loan may now find the EIDL program warrants a second look.

Here’s what you need to know about the different types of relief provisions available.

Terms of the Economic Injury Disaster Loan Program
Generally, an EIDL can have a term of up to 30 years and a 3.75% interest rate for small businesses. Unlike a PPP loan, an EIDL is not eligible for forgiveness. Currently, an EIDL is capped at $150,000 per loan. Also, in contrast to the PPP loan program’s focus on local lenders, an EIDL is applied for directly through the SBA. Loans over $25,000 can require certain guarantees and/or security.

In order to provide immediate economic assistance, a borrower can request up to a $10,000 advance on an EIDL that does not have to be paid back, and the advance can be retained even if the borrower eventually declines to incur an EIDL. Any EIDL advances received will reduce the amount of possible PPP loan forgiveness.

Eligibility for EIDL
A borrower is generally eligible for an EIDL if it has fewer than 500 employees and is not part of any prohibited business category. Business with over 500 employees but under certain SBA size standards are also eligible, as are certain private nonprofit organizations.

The program was temporarily restricted to certain agricultural businesses, but the SBA announced on June 15, 2020, that the EIDL program is again available to all eligible borrowers.

Uses of Funds Under the Program
EIDL proceeds can be used for payroll, accounts payable, rent, and certain debts. However, EIDL proceeds cannot be used to pay dividends or bonuses to owners, repay owner loans, help expand facilities or acquire fixed assets, repair or replace a damaged asset, or refinance long-term debt.

How to Use EIDL and PPP
A PPP loan borrower is also eligible for an EIDL, yet the proceeds from each loan program cannot be used for the same purposes. For example, you cannot use a PPP loan and EIDL to fund payroll expenses. One planning idea could involve using the PPP loan for payroll expenses and using the EIDL for working capital purposes.

Process and Timeline
Many prospective EIDL borrowers who filed applications in April and May are just now being notified that their loan has funded, so new borrowers may need to be patient. The SBA may require documentation of loss to support a borrower’s EIDL application, including:

  • Proof of loss of revenue
  • Increased expenses
  • Number of employees
  • Whether a borrower will be reimbursed from another source (through insurance, for example)

Tax returns and other financial data could also be required.

Knowing if the EIDL Program is Right for You
Many small businesses have understandably focused exclusively on the PPP loan program because the loan can be forgiven. As the PPP loan assistance wraps up, though, borrowers in need of additional assistance may benefit by applying for an EIDL.

Although an EIDL is not forgivable, its long-term and low interest rate may be attractive for some borrowers, and an immediate $10,000 advance can provide near-term liquidity for a small business struggling with the effects of the COVID-19 pandemic.

Deciding which relief provisions are right for you and your organization is a complex decision.

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