Article

Working Capital Solutions for Small Businesses – Economic Injury Disaster Loans

In light of all the uncertainty currently facing so many throughout the country, the SBA recently made available its Economic Injury Disaster Loans program to small businesses impacted by coronavirus.

< Back to Insights
Insights  <  Working Capital Solutions for Small Businesses – Economic Injury Disaster Loans

In light of all the uncertainty currently facing so many throughout the country, the SBA recently made available its Economic Injury Disaster Loans program to small businesses impacted by coronavirus.

In light of all the uncertainty currently facing so many throughout the country, the Small Business Administration (SBA) recently made available its Economic Injury Disaster Loans (EIDL) program to small businesses impacted by coronavirus.  Although not a new program (in the past, it’s been offered during times of natural disaster), the program is offering loans with very attractive interest rates to businesses and private not-for-profit organizations.  Meant for those who have already suffered substantial economic injury or are likely to in the near future, the program does differ from more traditional business loan programs, especially in terms of decision-making processes and criteria.

First, it’s important to recognize the intent of the EIDLs – to assist entities with working capital requirements such as salaries, rent, utilities, and the like.  EIDLs are not intended for improvements to a business, or to refinance prior debt at more favorable terms.  Additionally, EIDLs are not meant for small businesses with access to other credit; the intention is to assist borrowers who do not have other means of access to credit.

Specifically, the program allows for entities to receive a loan of up to $2 million, at interest rates of 3.75% for small businesses and 2.75% for private non-profits.  These rates are not dependent on credit worthiness; if an entity is approved for the loan, that is the interest rate they can expect to pay.

Another unusual feature of the EIDLs is the fact that applicants do not ask for a specific amount.  Instead, the entity will supply information regarding monthly sales, organizational assets and liabilities, owners’ assets and liabilities, etc., and the SBA will then take this information to determine the amount of the loan and length of the term (usually between 20 and 30 years) to arrive at a monthly payment that the SBA determines is affordable to the borrower.  Monthly payments for the loan are deferred for the first six months.

In its decision-making process, the SBA will look at factors such as credit history and the ability of the entity to repay the debt.  For loans over $25,000, collateral is required.  (That said, the SBA has said it will not decline loans just because there is no collateral; if collateral is already being used to secure another loan, the SBA will take a subordinate position.)  Additionally, business owners will be required to personally guarantee these loans – this includes any person that owns at least 20% of the business.

The application itself consists of five forms:

  • Form 5 requires the basic information of each owner with a stake at or above 20%.
  • Form 1436 asks for the monthly sales figures of the entity.
  • Form 413D asks for a statement of personal net worth.
  • Form 2202 asks for further information on the entity’s liabilities.
  • Form 4506-T is the IRS tax return release.

Additionally, entities will be requested to supply their tax returns.

These forms request a great deal of information and could take the business owner a day (or more) to fill out, depending on the organization’s record-keeping.  That said, it’s crucial for organizations to be thorough – if information is missing or left blank, the SBA could reject the application and send it back to the potential borrower for revision, effectively placing them at the end of the queue.  Two quick tips:  with respect to the monthly sales form, be sure to report sales consistent with your tax reporting election.  Additionally, if a field in the application is not relevant to the organization or owner, the space should be filled with a “$0” or “N/A” as opposed to leaving it blank, so the SBA knows that the organization considered the point rather than skipped over it or forgot it.

In terms of expectations, the best-case scenario for a small business or not-for-profit to see any funds – taking into consideration the time it takes the entity to fill out the forms, the SBA to process the application, and the loan to close – is about a month.  On the positive side, early information suggests that the approval rates for these loans are high.

As more states begin to become severely affected by the coronavirus pandemic, the processing time may increase, so it’s crucial for small businesses and private not-for-profits to collect their good and complete information – whether with the help of a business advisory firm or on their own – as quickly as possible to take advantage of these great rates, and keep their organizations afloat while they ride out these current conditions.

COVID-19 Business Resources

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

Disclaimer: The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation

Continue the Conversation with Our Team
Get in touch with us.

Contact Us