The Coronavirus Aid, Relief, and Economic Security (CARES) Act -- the $2 trillion spending law approved on March 27, 2020 – didn’t just spawn new loan programs in reaction to the COVID-19 economic crisis, it also expanded an existing one -- the Economic Injury Disaster Loan (EIDL) program -- and added the Emergency Economic Injury Grant program.
The Small Business Administration (SBA) normally provides “low-interest loans to help businesses and homeowners recover from declared disasters.” While this would normally be limited to businesses located in specific disaster zones, according to the SBA, “Small business owners in all U.S. states and territories are currently eligible to apply for a low-interest loan due to Coronavirus (COVID-19).”
The CARES Act authorized low-interest EIDLs of up to $2 million. An eligible borrower may apply for loans under EIDL and the Paycheck Protection Program (PPP), but the funds can't be used for the same purposes.
Eligible borrowers include the usual small businesses under 500 employees, as well as most sole proprietorships (with or without employees, as long as they are under 500 employees), independent contractors, and cooperatives and employee owned businesses (under 500 employees). The SBA explains their normal size standards here. As discussed with the PPP loan program, SBA's affiliation rules currently exclude many small businesses with venture capital and private equity investment, although the Insights Association has written to the Treasury Department and SBA about this issue, with a particular eye on impediments to eligibility for small businesses with minority investment from venture capital.
The loans are available to pay for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses. Per the SBA: “These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%. The SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.”
According to the U.S. Chamber of Commerce, "Up to $200,000 can be approved without a personal guarantee… Approval can be based on a credit score and no first-year tax returns are required… [and] Borrowers do not have to prove they could not get credit elsewhere." Further, although loans of $25,000 or less don’t demand collateral, larger loans may use “general security interest in business assets… instead of real estate.”
EIDL loans may not be used for: (1) refinancing debt incurred prior to the disaster; (2) paying off loans owned by a federal agency or a Small Business Investment Company; (3) paying civil or criminal fines or penalties; (3) repairing physical damage; (4) paying dividends or other disbursements to owners, partners, officers or stockholders, except for certain amounts directly related to their performance of services for the business; or (5) expanding facilities or acquiring of fixed assets.
Unlike the PPP loans, EIDL loans are not forgivable.
In addition to EIDL loans, the Emergency Economic Injury Grants are emergency advances of up to $10,000 that can be issued within three days of applying for an EIDL. According to the Senate Small Business and Entrepreneurship Committee, "The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments."
These grants are available until the end of the year, and “are backdated to January 31, 2020 to allow those who have already applied for EIDLs to be eligible to also receive a grant.”
If a borrower receives a PPP loan or refinances an EIDL loan into a PPP loan, “any advance amount received under the Emergency Economic Injury Grant Program would be subtracted from the amount forgiven in the PPP.” However, borrowers cannot use their EIDL loan for the same purposes as their PPP loan. For example, the Senate Small Business and Entrepreneurship Committee said, “if you use your EIDL to cover payroll for certain workers in April, you cannot use PPP for payroll for those same workers in April, although you could use it for payroll in March or for different workers in April.”
Applications for the EIDL loans and the emergency grants can be started at this SBA website.
This information is not intended and should not be construed as or substituted for legal advice. It is provided for informational purposes only. It is advisable to consult with private counsel on the precise scope and interpretation of any laws/regulation/legislation and their impact on your particular business.