Recently the U.S Congress approved the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or “Act”), to provide emergency assistance for families and businesses affected by the COVID-19 pandemic. Section 1107 of the CARES Act makes $10 billion available in grants for “Emergency Injury Disaster Loans” (EIDL’s) for the covered period from January 31, 2020 through December 31, 2020.

These grants are and advance of up to $10,000 of the proceeds of the loan that do not have to be repaid, even if the loan application is denied. The grant will be sent to applicants as soon as three days if they are found eligible. The rest of the loan, if approved, must be repaid and is not forgivable.

Before receiving the loan advance, the SBA must receive certification under penalty of perjury by the applicant that they are eligible. The advance payment may be used for providing paid sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, making rent or mortgage payments and repaying obligations that cannot be met due to revenue losses.

Businesses with less than 500 employees which have suffered a substantial economic injury and may qualify for this program. Individuals operating as a sole proprietor or an independent contractor may also qualify.

The SBA’s EIDLs offer up to $2 million in assistance and can provide working capital to help small businesses survive until normal operations resume after a disaster. The loans have repayment terms of up to 30 years and interest rates of 3.75% for small businesses and 2.75% for non-profits. The loan terms are set on a case-by-case basis, depending on each borrower’s ability to repay.

In order to make the loans immediately available, the CARES Act mandated the SBA to approve and offer EIDL loans based solely on an applicant’s credit score, or to use an appropriate alternative method for determining an applicant’s ability to repay the loan. Many of the traditional requirement for an EIDL loan such as, Personal guarantee on advances and loans below $200,000, 1-year of existence before the disaster, and proof of inability to access to credit elsewhere, were eliminated.

Funds for the EIDL’s come from the U.S. Treasury. Applicants can apply directly at: DisasterLoan.sba.gov.

What is a “Substantial Economic Injury”?

It generally means a decrease in income or increase of expenses from operations or working capital resulting in the business’s inability to meet its ordinary obligations in the normal course of business.

Applicants must establish that the claimed economic injury is substantial and is a direct result of the declared disaster.

Is the EIDL required to be used for specific a specific purpose?

Yes. Your loan will be designated for specific purposes EIDLs such us pay fixed debts, payroll, accounts payable and other operating expenses that can’t be paid because of the disaster’s impact. You cannot use the EIDL loan to expand your business operations, pay cash dividends or bonuses, or disburse payments to owners, partners, officers or stockholders not directly related to the performance of services for the business. The penalty for misusing disaster funds is immediate repayment at one and a half times the original amount of the loan.

The SBA will not refinance long-term debts or provide working capital that was needed by the business prior to the disaster.

How much can I borrow through an EIDL Loan?

You may request to borrow up to the amount of economic injury based on the operating needs that your business could have paid had the disaster not occurred.

The Disaster Business Loan application requires the applicant business to enter the amount of loan being requested, if known. The loan amount requested should be based on the applicant business’s actual economic injury.

How do you demonstrate Substantial Economic Injury?

In determining your eligible amount, the SBA will look at: (a) the total of your debt obligations; (b) operating expenses that mature during the period affected by the disaster, plus the amount you need to maintain a reasonable working capital position during that period; and (c) expenses you could have met and a working capital position you could have maintained had the disaster not occurred. Each COVID-19 disaster loan exceeding $25,000 is required to be secured by some form of collateral.

How Can You Demonstrate Your Business Suffered Substantial Economic Injury?

Lack of profit or decreased sales can be due to different reasons besides a disaster. Therefore, in order to qualify for the disaster loan, the business applicant must demonstrate “causation” of the economic injury through the historical comparison of key financial indicators of the performance of the business before and after the disaster. The applicant must document significant changes in financial indicators such as:

·         Sales Dollars and Volumes

·         Losses or reduced profits

·         Cash Burn Rate

·         Current Ratio, Quick Ratio and Days Sales Outstanding

·         Accounts Receivable Aging and Turnover

·         Accounts Payable Aging and Turnover

·         Inventory Turnover

·         Debt Service Coverage

It is also important to consider that businesses may experience additional costs as a result of a disaster, for example additional clean up costs and protective equipment for workers.

What Type of Information Will Be Required?

Applicants will be required to submit the following forms along with the application to be considered for a EIDL loan:

·         Business Tax returns

·         SBA Form 5 or Form 5C (Loan Application Form)

·         IRS Form 4506-T (Tax Information Authorization)

·         Schedule of Liabilities listing all fixed debts (Form 2202)

·         Personal Financial Statement (SBA Form 413D)

The SBA requires the principals of the business to personally guarantee repayment of the loan, and some sort of collateral for loans above $25,000.

Focusing on the recovery of your business should be your main goal, that is why we are ready to assist you with the SBA EIDL application process.  From quantifying your actual economic injury to preparing the supporting documentation to submit with your loan application, we will be next to you to help you receive the funding needed to your way to recovery.