Eligibility for U.S. Small Business Administration’s Economic Injury Disaster Loan
Originally posted on March 27, 2020 Updated as of April 24, 2020
The U.S. Small Business Administration has made Economic Injury Disaster Loans (“EID Loans”) of up to $2 million available to qualifying small businesses that have suffered substantial economic injury from the COVID-19 pandemic. Substantial economic injury means the business is unable to meet its obligations and to pay its ordinary and necessary operating expenses.
The maximum interest rate on an EID Loan is 3.75% for small businesses and 2.75% for private nonprofit organizations. The EID Loan may be used to cover accounts payable, debts, payroll and other bills in which the organization may be struggling to pay; however, the proceeds cannot be used to refinance long term debts. Borrowers may be eligible to refinance the outstanding balance owed on an existing EID Loan into a new forgivable loan under the Paycheck Protection Program, an SBA-administered loan and loan forgiveness program established under the recently passed CARES Act. Click here for more information about SBA loans offered under the CARES Act.
Although EID Loans may not exceed $2 million, the actual amount of each EID Loan is limited to the amount of economic injury determined by the SBA, less any business interruption insurance and other recoveries. The term of any EID Loan may not exceed 30 years. The SBA will determine an appropriate installment payment based on the financial condition of each borrower, which in turn will determine the actual term of the loan. Collateral is required for all EID Loans over $25,000 and applicants should anticipate providing a personal guaranty. The SBA will likely require the borrower to obtain and maintain appropriate insurance on its assets and collateral given for the loan.
The SBA’s size standards define the largest size a business can be to receive an EID Loan. Size standards vary by each particular applicant’s NAICS industry classification code and are generally based on the number of employees or the amount of the applicant’s annual receipts. A list of the size standards for each NAICS code can be found at 13 C.F.R. § 121.201. The SBA also offers a size standards tool to help potential applicants determine the size standards applicable to their particular industry.
Eligibility issues often arise regarding the determination of an applicant’s:
- Annual receipts (gross income plus cost of goods sold);
- Number of employees (any person on the payroll must be included as one employee regardless of hours worked or temporary status); and
- Affiliated entities.
When calculating the size of your business, you must include the annual receipts and the employees of your affiliates. In general, the SBA will determine affiliation based on control (whether direct or indirect) of the related entity and will consider factors such as ownership, management, previous relationships with or ties to another concern, and contractual relationships, in determining whether affiliation exists and “will consider the totality of the circumstances, and may find affiliation even where no single factor is sufficient to constitute affiliation.”
EID Loans are processed on a first-come, first-served basis, and the SBA application process is complicated; interested businesses are encouraged to obtain the necessary application materials and work with diligent knowledgeable professionals during this process.
Our firm stands ready to serve our clients and friends in these difficult and unprecedented times. While following all federal, state and local government directives and public health and safety protocols, our offices are fully operational, and we remain ready and able to provide service. If you have any questions about EID Loans or other legal implications of COVID-19, please do not hesitate to contact us for help.