Small Business Administration Economic Injury Disaster Loans

NOTE: This memorandum summarizes certain congressional actions in response to the COVID-19 situation, and has been last updated as of [post_published]. Congressional response changes rapidly, sometimes daily. This memorandum is for informational purposes only and should not be relied on as the sole basis for any actions related to the matters discussed herein. Please contact us for the latest information and to discuss your options.

On March 20, 2020, the U.S. Small Business Administration (“SBA”) issued an Economic Injury Disaster Loan declaration for the entire State of Mississippi. The effective date is January 31, 2020. Businesses in Mississippi are now eligible to apply for low-interest federal disaster loans for working capital. These loans are Economic Injury Disaster Loans (“EIDL”) for businesses suffering substantial economic injury as a result of the Novel Coronavirus (“COVID-19”). In this memo, we hope to provide you with some basic, useful information about how the SBA’s Disaster Assistance Loan program works, who is eligible, and how to apply for an EIDL. Given the breadth of the COVID-19 disaster, we recommend an early application.

The information below is based on the current status of the SBA’s EIDL Program, including as amended by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which Congress passed on March 27, 2020.

Who is Eligible?

  • Small businesses, small agricultural cooperatives, most private nonprofit organizations, sole proprietorships (with or without employees), and independent contractors who have suffered a substantial economic injury[1] as a result of COVID-19.
  • Applicants must have a credit history acceptable to the SBA and must show the ability to repay the loan.
  • Applicants who have defaulted on or failed to comply with the terms of a prior SBA loan may not be eligible.
  • The CARES Act has waived the normal requirement that the applicant needs to be in business for the 1-year period before the disaster is waived, except that no waiver may be made for a business that was not in operation on January 31, 2020.
  • The CARES Act has waived the normal requirement that an applicant be unable to obtain credit elsewhere.

Loan Limit, Interest Rate, and Terms

  • $2,000,000.00 maximum.
  • Interest Rate: 3.75% (non-profits 2.75%).
  • Maximum term is 30 years. After reviewing the financial condition of each applicant, the SBA will determine the appropriate installment payment, which in turn will determine the loan term.
  • EIDLs may pay existing fixed debt, employee payroll, accounts payable, and other expenses of operation. EIDLs may not be used to refinance long term debts.
  • Loans typically take 14-20 days to fund, however, the SBA is working to shorten this timeframe for COVID-19 EIDLs.
  • Currently, EIDLs are direct through the SBA.
  • Covered period is January 31, 2020 and ending December 31, 2020.
  • Personal guarantees on advances and loans of not more than $200,000 are waived.
  • The SBA will approve an applicant based solely on the credit score of the applicant and shall not require an applicant to submit a tax return or a tax return transcript for approval of the EIDL. The SBA may also use “alternative appropriate methods” to determine an applicant’s ability to repay.

Is Collateral Required?

  • Collateral is required for loans over $25,000.00.
  • The SBA will require the borrower to pledge collateral that is available and will take real estate if available.
  • The SBA will not, however, decline a loan for a lack of collateral.

Emergency Grants

  • An entity eligible for an EIDL may request an advance up to $10,000 on its EIDL application.
  • This Emergency Grant is not required to be repaid.
  • Permissible uses: in addition to the allowable uses under the Small Business Act, the advance may be used for (1) paid sick leave for employees “unable to work due to the direct effect of the COVID-19,” (2) maintaining payroll to retain employees during business disruptions or substantial slowdowns, (3) meeting increased costs to obtain materials unavailable from the applicant’s original source, (4) rent or mortgage payments, and (5) repaying obligations that cannot be met due to revenue loss.
  • If the applicant receives a 7(a) Paycheck Protection Program Loan, the advance amount shall be included when determining the amount of a loan forgiveness in connection with meeting payroll costs.

How to Apply

[1] A substantial economic injury means that “the business is unable to meet its obligations and to pay its ordinary and necessary operating expenses.”