What is an SBA Economic Injury Disaster Loan (EIDL)?
For small businesses in declared disaster areas, a federal program has been activated by the SBA called Economic Injury Disaster Loans (“EIDL”). EIDLs help to offset economic loss. The SBA is providing access to low-interest disaster loans for small businesses of all sizes, in eligible areas. All 50 states have been declared disaster areas and are considered eligible areas.
For restaurant businesses, an EIDL is an affordable way to get working capital to help recover from the economic losses caused by the COVID-19 health crisis. Interest rates on EIDLs do not exceed 4% per year (they are currently 3.75% for for-profit businesses and 2.75% for non-profits), the term can be up to 30 years, and the loan amount available is up to $2 million.
With the CARES Act recently getting passed by the federal government (read more about that here), there have been some changes made to the EIDLs, including relaxed eligibility requirements, which have been outlined below, which have been outlined below, and an increase of $10B in available funds.
In addition to the changes made to the EIDL program (discussed below), the CARES Act provides small businesses with access to $349B in SBA loans called Paycheck Protection Loans (“PPLs”), that permit certain amounts to be forgiven if used for payroll, utilities, interest on a mortgage, or rent. Small businesses will be able to have an EIDL, in addition to a PPL, provided the loans are not used for the same purpose.
The CARES Act makes it possible for small businesses that apply for an EIDL between January 31, 2020 and December 31, 2020 to request a grant of up to $10K. The small business will receive the grant within three days of applying for an EIDL, assuming the small business meets the eligibility requirements for an EIDL. The business will not need to repay the grant, even if the EIDL application is later denied. The grant funding can be used for any purpose that any COVID-19 related substantial economic hardship that an EIDL could be used for, including:
Providing paid sick leave to employees unable to work due to COVID-19
Maintaining payroll to retain employees during business disruptions or substantial slowdowns
Meeting increased costs to obtain materials unavailable from the the original source due to interrupted supply chains
Making rent or mortgage payments
Repaying obligations that cannot be met due to revenue losses
Small businesses can apply for an EIDL in addition to a PPL, provided the loans are not used for the same purpose. A small business that received an EIDL between January 31, 2020 and April 3, 2020, can refinance their EIDL into a PPL. Refinancing from an EIDL to a PPL could be beneficial because PPL amounts used for specific purposes during the eight weeks after the loan is made can be forgiven if used for specific purposes. If a business receives a $100,000 EIDL in February to use for payroll costs through the summer, the business could refinance the balance of the EIDL into a PPL and be eligible to have the portion of the loan spent on payroll costs for the next eight weeks forgiven. Just keep in mind, if you have received an advance grant in connection with your EIDL (as described above, up to $10,000) and used it for payroll costs, that amount will be reduced from the amount available to be forgiven.
There are a few things to consider when deciding whether to refinance an EIDL into a PPL:
EIDLs allow you to defer principal and interest payments for up to four years, whereas you can only defer PPLs for six months.
EIDLs have a maximum term of 30 years (based on the financial condition of the borrower), while PPLs have a maturity of two years. If a business receives the EIDL grant (up to $10K) and later refinances the outstanding balance of the EIDL into a PPL (available for those who received an EIDL between January 31, 2020 and April 3, 2020), the amount of the grant that is spent on payroll costs will be subtracted from the amount forgiven.