COVID-19: SBA Economic Injury Disaster Loan Program
By William B. Eck, partner, Seyfarth Shaw
Small business, small agricultural cooperatives and most nonprofits in all 50 states and U.S. territories impacted by COVID-19 are eligible to apply for a low interest loan under the Coronavirus Preparedness and Response Supplemental Appropriations Act. The parameters of the eligibility for and terms of these economic injury disaster loans (EIDLs) are summarized below. The likely soon to be passed stimulus bill is expected to expand the COVID-19 relief efforts offered through SBA’s loan programs. We will supplement this communication with a summary of the stimulus package provisions. The key features of the current COVID-19 EIDL program are below:
Eligibility for EIDLs: Small Business. Small business determinations are based on the SBA Table of Small Business Size Standards, which defines the maximum size that a business may be in order to remain classified as a small business. The size standard varies based on the business’ industry, average annual sales and/or average number of employees. Some examples are as follows: (i) manufacturing — maximum number of employees ranges from 500 to 1,500, with approximately 27 percent of manufacturing businesses capped at 500 employees; (ii) wholesale trade — maximum number of employees ranges from 100 to 250; (iii) retail trade — some retail trade industries are set at $7,500,000, others are capped at 100 to 500 employee maximums; (iv) transportation and warehousing — maximum number of employees ranges from 500 to 1,500, some sub-industries are defined by $7.5 million to $37.5 million in average annual receipts, (v) information — the maximum number of employees ranges from 500 to 1,500, and the maximum average annual receipts ranges from $7.5 million to $35 million; (vi) finance and insurance — maximum number of employees of 1,500 and maximum annual average receipts ranging from $32.5 million to $38.5 million. Use your Census Bureau Industry Code at the SBA website to see if you are considered a small business by the SBA: www.sba.gov/size-standards.
The EIDLs. The EIDLs are for up to $2 million. They bear interest at the annual rate of 3.75 percent for small business and 2.75 percent for nonprofits. The term of the loan may be for up to 30 years. Loans in excess of $25,000 in general must be secured by collateral. To the extent that the borrower does not have adequate collateral, assets of the business owners may need to be pledged.
Availability of EIDLs. EIDLs are available to meet obligations that cannot otherwise be met, but could have been met had the disaster not occurred. They are not available to replace lost revenue or profit, or for business expansion.
Use of Loan Proceeds. Loan proceeds may be used to pay rent, payroll and other obligations. However, loan proceeds may not be used to refinance debt incurred before the disaster, make payments on loans owned by another federal agency or the SBA, pay tax penalties or criminal or civil fines, repair physical damage, or pay dividends or disbursements to the owners except for payments for services for the business.
Underwriting the Loan; Guaranties and Additional Collateral. The SBA must determine the borrower to be creditworthy. The SBA reviews the financial statements of the borrower and each partner, officer, director and 20 percent or greater stockholder. Such persons may be required to personally guaranty the loan and, as noted, in the case of owners, to pledge assets to secure the loan. As with other SBA loan programs, there is a 6-month look back period for divestitures to bring an owner below the 20 percent threshold, so an owner may not simply divest to 19.5 percent, for example, in order to avoid these requirements.