On June 15, 2020, the Small Business Administration (SBA) announced new applications for the Economic Injury Disaster Loan (EIDL) and EIDL emergency grants are now being accepted. Although EIDLs have long been an option available to those businesses “injured” due to a declared disaster, program eligibility was broadened to include additional businesses in the U.S. impacted by COVID-19. Initially introduced as an increased funding option along with the Payroll Protection Program (PPP), the SBA stopped accepting applications after the initial round of loan funding was exhausted. This was peculiar to many because although Congress allocated additional money ($60B), application acceptance did not resume. Despite the unusual break, the program has been a source of needed help for many as more than 40,000 loans totaling $2.5B have been awarded to Michigan businesses. As reopening continues and the focus shifts to recovery, EIDLs can still serve as a favorable and needed source of funding. To help clients, prospects and others, Clayton & McKervey has provided a summary of key program details below.
Only small businesses meeting certain employee, operations, and revenue criteria are allowed to participate. This includes a business, cooperative, tribal small business concern, agriculture cooperative, aquaculture enterprise, nursery, or producer with less than 500 employees. Individuals that operate as a sole proprietor (with or without employees) or as an independent contractor may apply. Finally, private nonprofit organizations not associated with a government agency including 501(c), (d), or (e) types are also eligible.
A business must also not be involved in any illegal activity, formed as an agricultural business (except as outlined above), present live performances or sell products of a sexual nature, or receive more than 1/3 of gross revenue from legal gaming activities. In addition, any company involved in lobbying, state or local government agencies and members of Congress are also prohibited from applying.
Finally, the SBA has also stated that eligibility is based on the size and type of business including the ability to repay the loan and an acceptable business credit score.
Loan Terms & Conditions
The maximum application amount is $150,000 featuring various collateral and securitization requirements. Loans under $25,000 are exempt from this requirement. The interest rate is set at 3.75% for small businesses and at a reduced rate of 2.75% for private nonprofits. The maximum loan term is 30 years and payments are automatically deferred for 12 months.
There are broad restrictions on how loan funds can be spent by borrowers. This includes payments of dividends and bonuses, payments to owners (unless for the performance of services), repayment of loans from principals, expenses related to the acquisition of fixed assets, payments of loan obligations (including regular installment payments) and payments on any loans or assistance from any federal obligation (except IRS obligations and any relocation expenses.
The application can be completed online and requires supporting documentation including information on gross revenues, costs of goods sold, lost rents (where applicable), cost of operating expenses, number of employees and other reimbursement requirements. The applications are submitted to the Treasury and will be processed as soon as possible. It’s important to note if an applicant is initially rejected, they have up to six months to provide new information and submit a letter of reconsideration.
These advances are available to applicants which require an immediate cash flow infusion before formal loan approval. The amount is equal to $1,000 per employee up to $10,000 and is not subject to repayment if the loan application is not approved. This means independent contractors can receive $1,000 simply for applying. The advance application is reviewed within three days of submission and funds are distributed shortly thereafter. The advance can be used for payroll expenses, leave and other employee benefits, cost of mortgage or rent, and other operational expenses.
As the focus changes from survival to recovery and economic conditions change, businesses may look for new funding sources to bolster their financial situation. If you have questions about the information outlined above or need assistance with another COVID-19 business issue, Clayton & McKervey can help. For additional information call us at 248-208-8860 or click here to contact us. We look forward to speaking with you soon.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.