Part 1: Coronavirus Preparedness and Response Supplemental Appropriations Act, PL 116-123 (March 6, 2020)
ECONOMIC INJURY DISASTER (“EID”) LOANS
As authorized by PL116-123, the SBA has made Economic Injury Disaster Loans (“EID Loans”) available for qualifying businesses that have suffered economic injury as a result of the Coronavirus epidemic. Below is a summary of the SBA’s eligibility requirements, application procedures, and general loan terms for the EID Loans.
In order to be eligible for an EID Loan, a business must first be located in a geographic area that is a declared disaster area recognized by the SBA. Recognized Declared Disaster Areas are listed on the SBA’s website. As of March 19, 2020, Virginia was approved for disaster loan assistance due to the Coronavirus.
Any business seeking an EID loan must qualify as a small business to be eligible for an EID Loan. The definition of a “small business” varies by industry but generally is based on the number of employees a business has or the amount of revenue a business generates annually. Businesses should consult the SBA’s interactive website to determine whether or not they qualify as a “small business” under the SBA’s regulations. Nonprofit organizations may also qualify for EID Loans.
In order to qualify, a business must demonstrate that it has suffered “substantial economic injury” as a direct result of the Coronavirus outbreak. A “substantial economic injury” generally means a decrease in income from operations or working capital with the result that the business is unable to meet its obligations and pay ordinary and necessary operating expenses in the normal course of business. An applicant’s eligibility for an EID Loan will be determined by the SBA based on the applicant’s type of business, available financial resources, and its demonstration of substantial economic injury.
The Application Process
An application can be made online (which is faster) or by submission of a paper Form 5.
In addition, an applicant must submit the following documentation to the SBA –
- Tax Information Authorization (IRS Form 4506T), completed and signed by each principal owning 20% or more of applicant business, general partner, general manager or owner who has 50% ownership interest in affiliate business. (Affiliates include, but are not limited to business parents, subsidiaries, and/or other businesses with common ownership or management with applicant business.)
- Complete copies, including all schedules, of the most recent Federal income tax returns for the applicant business; if unavailable a written explanation must be submitted in lieu
- Personal Financial Statement (SBA Form 413) completed, signed, and dated by the applicant and each principal, general partner or managing member.
- Schedule of Liabilities listing all fixed debts (SBA Form 2202)
Following the submission of a complete loan application, the SBA will conduct a credit check of the applicant and verify the business’ financial information. The SBA may request additional financial information including tax returns for principals, general partners and managing members of the business, as well as a current profit-and-loss statement, and balance sheets for the business. The SBA’s stated goal is to review an application and decide on a business’ eligibility for the EID loan program within 2-3 weeks. Given the anticipated high volume of applications to this program as a result of the Coronavirus, it is likely that the application and review process will take longer. Once an application is fully accepted and approved, the applicant will need to sign the applicable EID Loan documents and return them to the SBA. The applicant can expect to receive a disbursement of the EID Loan funds within one week from the SBA’s receipt of the fully executed loan documents.
The EID loan amount awarded by the SBA will be based off an applicant’s actual economic injury and the business’ financial needs, as determined by the SBA. The SBA will factor in the availability of other potential sources of financial contribution and business interruption insurance when determining an EID loan amount to be awarded to a small business.
EID Loan Use and General Terms
The funds from an EID loan may be used by the small business to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The terms of an EID Loan shall be determined by the SBA on a case-by-case basis, based upon each applicant’s needs and ability to repay. Generally, the maximum amount of an EID loan for the Coronavirus disaster is $2 million with an interest rate of 3.75% for small businesses or 2.75% for non-profits. The maximum repayment term of an EID loan is 30 years. There are no pre-payment penalties imposed by the SBA on an EID loan.
Alternatives to EID Loans
Small businesses that do not qualify for EID loans or have alternative needs may still be eligible for financial assistance from one of the SBA’s alternative loan programs.
The SBA has a 7(a) Loan Guarantee Program that involves loans for small businesses in an amount up to $5,000,000 made by private lenders that are guaranteed by the SBA (“SBA 7(a) Loan”). An SBA 7(a) Loan is made directly by a private lender, who also handles the application and loan process, but is subject to the SBA’s terms and guidelines. To encourage private lenders to make these loans, the SBA guarantees a certain percentage of the SBA 7(a) Loan amount. Small businesses looking for an acceptable lender for an SBA 7(a) Loan can use the SBA’s lender matching tool or contact their local SBA office for recommendations. The general timeline for the approval of an SBA 7(a) Loan application is 5 to 10 business days.
In order for a business to qualify for an SBA 7(a) Loan, it must qualify as a “small business” under the SBA’s regulations, operate for profit, be engaged in, or propose to do business in, the U.S., have reasonable owner equity and resources to invest in the business, and be for a sound business purpose. The acceptable use of the 7(a) Loan funds is generally less restrictive than that of the EID loans and permissible uses include use for working capital, expansion or renovations, new construction, the purchase of land or buildings, the purchase of equipment or fixtures, leasehold improvements, the refinancing of existing debt for compelling reasons, seasonal line of credit, inventory, or starting a business. The proceeds from an SBA 7(a) Loan may not be used for the reimbursement of an owner for previous personal investments toward the business, the repayment of any delinquent withholding taxes, or anything not deemed a “sound business purpose” as determined by the SBA. Interest rates for SBA 7(a) Loans are determined by the private lender and generally based on the prime rate or LIBOR rate at the time of the loan but are subject to interest rate caps set by the SBA.
For businesses that need loan funds in a shorter period of time, the SBA offers an SBA Express loan program which provides term loans and line of credits in amounts up to $350,000. The approval process for an SBA Express loan is generally completed within 36 hours of receipt of an application. An SBA Express loan must also be obtained through a private lender and may be used for the same general purposes as an SBA 7(a) Loan.
If you have questions or concerns about this legislation and its impact, please contact us. Our attorneys have extensive experience with employment law and we are happy to work with you over the phone or via virtual meeting so that you can ensure your business is in compliance.