SBA Includes COVID-19 in Economic Injury Disaster Loans

March 25, 2020Alerts

[This alert relates ONLY to loans issued in connection with the SBA’s Disaster Loan program. It does not address SBA 7(a) loans or changes to the SBA 7(a) loan program contemplated by the “Coronavirus Aid, Relief, and Economic Security Act” (“CARES Act”)

The U.S. Small Business Administration has made Economic Injury Disaster Loans of up to $2 million available to qualifying small businesses that have suffered substantial economic injury from the COVID-19 pandemic.

Because loans are processed on a first-come, first-served basis, and the SBA application process is complicated, interested businesses are encouraged to diligently obtain the necessary application materials and work with knowledgeable professionals when needed. Collateral is required for all EID Loans over $25,000 and applicants should anticipate providing a personal guaranty.

SBA also offers alternative funding options for businesses that are not interested in or ineligible to receive an EID Loan. For Example, the SBA’s 7(a) Loan program provides eligible small businesses with loans of up to $5 million with a maximum maturity of 25 years. Unlike EID Loans, which are currently only available directly from the SBA, many local banks provide 7(a) loans and offer competitive terms.

The EID Loan Program

A small business has suffered “substantial economic injury” when it is unable to meet its financial obligations, pay ordinary and necessary operating expenses, or has a reduction in working capital. Applicants can utilize the SBA’s interactive website to determine whether they meet the SBA’s “small business” size standard. A business must operate in an area declared a disaster area to qualify for an EID Loan. Interested businesses should check the SBA’s website for a list of declared disaster areas. (We anticipate that all U.S. businesses will ultimately be eligible to apply for an EID Loan).

Small businesses can use EID Loans to pay ordinary and necessary operating expenses, including payroll and accounts payable. However, an EID Loan cannot be used to refinance existing debt. Businesses may apply to borrow a maximum of $2 million and interest rates may not exceed 3.75 percent for private businesses (2.75 percent for nonprofits). EID Loans have a maximum term of 30 years.

The SBA determines final loan terms on a case-by-case basis after evaluating each applicant’s needs. Ultimately, loan terms are predicated on the economic injury sustained and an applicant’s ability to payback its obligations.

Businesses can submit EID Loan Applications via the SBA’s online application OR by completing and mailing SBA Form 5.

Requisite Documentation

The SBA recommends that all EID Loan applications be submitted online and envisions a processing time of two to three weeks. Businesses must include the following documentation with the EID Loan application:

  • Business tax returns for the prior three years (IRS Form 4506T)
  • Personal tax returns for each principal owning 20 percent or more of the applicant and/or each general partner/managing member (NOTE: instances where a business affiliate is required to provide tax returns are outside the scope of this alert.)
  • Copies, including all schedules, of an applicant’s 2019 Federal income tax return (or an explanation if not available).
  • Personal Financial Statements (SBA Form 413) for each applicant, each principal owning 20 percent or more of the applicant and each general partner/managing member
  • Applicant’s debt Schedule (SBA Form 2202)

Applicants must confirm whether they have business interruption insurance and the SBA reserves the right to request additional information during the approval process. Finally, small businesses that have not complied with a previous SBA loans are ineligible to receive an EID Loan.

Note: businesses interested in applying for an EID Loan should continue to monitor the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) currently before the U.S. Senate. At the time of this writing, it is unclear the extent to which a recipient of an EID Loan will be eligible in the future to apply for a loan under the SBA 7(a) Loan program.

If you have questions about Economic Injury Disaster Loans, SBA loan programs or other corporate law questions, please contact Gabriel Herman at [email protected] or at 215-444-7338.