SBA Approving Economic Injury Disaster Loans (EIDLs): What You Need To Know

Small businesses applied for Economic Injury Disaster Loans (EIDL) in droves when they became available on March 30th.  Normally, these loans only provide assistance after natural disasters like tornadoes, wildfires or floods, but when President Trump declared Covid-19 a nationwide emergency on March 13th, the door opened for small businesses across the country to seek emergency financing. With uncertain prospects ahead, business owners saw the program’s maximum $10,000 advance as a way to tide their companies over until the effects of Covid-19 were under control. 

Unfortunately, the roll out of the program was much rougher than anticipated. A flood of applications overwhelmed the system and the SBA stopped processing the first round of EIDLs after about two weeks.  With the second round of funding, the money lasted just about a week before the SBA limited applications to agricultural businesses. 

Additionally, the SBA was completely silent for weeks on the status of the applications that were submitted. The advances, which were supposed to be sent within three days of applying, were delayed for weeks and adjusted to $1,000/employee or a $1,000 for the self employed. 

But the advances began mysteriously showing up in applicants’ bank accounts a few weeks ago, and as of last week the SBA started processing and approving applications. As such, it seems like a good time to revisit the EIDL program and how its loans work. 

Overview of the loan terms

The EIDLs offer many favorable terms 

• Loans up to $2M 
• 30-year terms 
• Interest rates of 3.75% for small businesses (2.75% for non-profits) 
• First payment is 12 months from the date of the promissory note
• EIDLs smaller than $200,000 can be approved without a personal guarantee
• For loans under $25,000, the SBA does not take a security interest in any collateral 
• For loans above $25,00 the SBA takes a general security interest in any and all “Collateral” as defined in the promissory note
• There are no prepayment fees

Unlike the Paycheck Protection Program (PPP) loan, EIDLs do not have a forgiveness aspect. However, any advance funds that you received will not be included in the loan. 

Additionally, you may request a loan increase for additional disaster-related damages as soon as the need for additional funds is discovered. However, the SBA will not consider a request for a loan increase received more than two years from the date of loan approval unless, “there are extraordinary and unforeseeable circumstances beyond the control of the borrower.”

As they say, the devil is in the details. I got a copy of a Loan Authorization Agreement, Promissory Note, and Security Agreement. The document is 19 pages long.  You’ll want to make sure to read it carefully before immediately signing off on the loan.  Here are a couple of sections that caught my eye. 

The Security Interest Requirement  

For those loans over $25,000 the SBA lays claim on any tangible and intangible personal property including, but not limited to: 

• inventory, 
• equipment,
• instruments, including promissory notes, 
• chattel paper, including tangible chattel paper and electronic chattel paper, 
• documents,
• letter of credit rights,
• accounts, including health-care insurance receivables and credit card receivables, 
• deposit accounts,
• commercial tort claims,
• general intangibles, including payment intangibles and software and 
• as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code.

Unless you’ve taken a Secured Transactions class, a lot of that won’t sound familiar. You should note, though, that you “can’t sell, lease, license or otherwise transfer” any part of the collateral or interest in the collateral without the SBA’s consent, with the exception of inventory in the ordinary course of business. In other words, if you’re a business that sells products, you don’t need permission to sell the things you ordinarily sell. Just be aware of this clause and contact legal counsel if you may get rid of a business asset that might be included in the SBA’s claim. 

What can you use this loan for?

Unlike the PPP loan, which can only be used for payroll, business mortgage interest, business rent or lease payments and business utility payments, EIDL loan funds can be used for a wider-range of business working capital “to alleviate economic injury caused by disaster occurring in the month of January 31, 2020 and continuing thereafter.” 

That definition is a bit vague, but the SBA has provided some additional guidance in supplemental materials. Eligible expenses include 

• Fixed debts (rent, etc.) 
• Payroll 
• Accounts payable 
• Some bills that could have been paid had the disaster not occurred.

They also provide a longer list of funds the loans cannot be used for cannot be used for 

• Dividends and bonuses 
• Disbursements to owners, unless for performance of services  
• Repayment of stockholder/principal loans (with exceptions) 
• Expansion of facilities or acquisition of fixed assets 
• Repair or replacement of physical damages 
• Refinancing long-term debt
• Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company
• Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations  
• Relocation (however, you can request written consent to relocate)

Obviously, you’ll have to keep track of how you use these loan funds. You’ll probably want to establish a separate business account for operating expenses, if you don’t already have one. 

The SBA requires that you keep books and records “for the most recent 5 years until 3 years after the date of maturity, including extensions, or the date this Loan is paid in full, whichever occurs first.” In addition, you will have to keep “itemized receipts (paid receipts, paid invoices or cancelled checks) and contracts for all loan funds spent.”  In short, it’s as important than ever to keep good records. 

How will this work with PPP and Unemployment Benefits? 

Many of you applied for all of the benefits available to you including the EIDL, PPP and unemployment benefits. Now all of the benefits are being approved at the smae time, and it’s hard to know how they all work together. 

No one has provided much information on how these programs complement each other yet.  However, we do know that EIDL funds cannot be used for losses that are compensated by other sources. Other sources included but are not limited to: 

• proceeds of policies of insurance or other indemnifications,  
• grants or other reimbursement (including loans) from government agencies or private organizations
• claims for civil liability against other individuals, organizations or governmental entities, and
• salvage (including any sale or re-use) of items of damaged property.

PPP funds are included in the category of grants or other reimbursements. The government has made it clear that you can have both types of loans as long as they are used for different expenses or “not for the same purpose.” It may be smart to keep the funds separate and use the PPP loans to pay employees since 75% of the funds must be used for payroll in order to be forgiven. You can use the EIDL funds for your other operating expenses.  

It’s also not clear how these funds affect your ability to receive Pandemic Unemployment Assistance (PUA).  The only guidance that we’ve received from the treasury states ”you should be aware that participation in the PPP may affect your eligibility for state administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle A of the CARES Act, or CARES Act Employee Retention Credits.” 

It’s best to avoid double dipping. In most states, you do have to certify your income every two weeks. If you are using these funds for payroll, you should let them know. 

In the EIDL loan documents, the SBA state it will in “its sole discretion determine whether any such compensation from other sources is a duplication of benefits.” So again, keep good records. 

Certifications 

Like the PPP Loan, EIDLs require certain certifications. Read them carefully before you take the loan. Here are a couple that stand out to me: 

• There has been no substantial adverse change in Borrower’s financial condition (and organization, in case of a business borrower) since the date of the application for this Loan. (Adverse changes include, but are not limited to: judgment liens, tax liens, mechanic’s liens, bankruptcy, financial reverses, arrest or conviction of felony, etc.).
• No claim or application for any other compensation for disaster losses has been submitted to or requested of any source, and no such other compensation has been received, other than that which Borrower has fully disclosed to SBA.
• Borrower certifies that no fees have been paid, directly or indirectly, to any representative (attorney, accountant, etc.) for services provided or to be provided in connection with applying for or closing this Loan, other than those reported on the Loan Application. All fees not approved by SBA are prohibited.

For loans over $150,000, the SBA requires recipients to agree to the following:

• Appropriated funds may NOT be used for lobbying.
• Payment of non-federal funds for lobbying must be reported on Form SF-LLL.
• Language of this certification must be incorporated into all contracts and subcontracts exceeding $100,000.
• All contractors and subcontractors with contracts exceeding $100,000 are required to certify and disclose accordingly.

If you wrongly apply for this loan, you may be subject to civil and/or criminal penalties. 

I hope that this gives you more insight into the obligations involved in taking on these loans. Unfortunately, right now, it’s a moot point for those who haven’t applied already. The SBA is no longer taking applications for them, except for agricultural businesses. I’ll make sure to update you if that changes.