The economic impact of the COVID-19 pandemic lingers and many programs – Paycheck Protection Program (“PPP”) loans, Restaurant Revitalization Fund (“RRF”) grants – have either expired or were oversubscribed. Meanwhile the Small Business Administration’s (“SBA”) COVID Economic Injury Disaster Loans (“EIDL”) program has funds available.
In response to the continuing crisis, the SBA has significantly enhanced the EIDL program both for new and existing borrowers. (You can read the announcement here.) Traditionally, the limit for EIDL was $2 million. To ensure that the COVID version didn’t run out of money, the SBA instituted a cap of $150,000, later increased to $500,000. The cap has now been removed entirely and borrowers can obtain loans of up to $2 million. Borrowers whose original loans were limited previously may apply for additional funds. The deferment period has also been extended from 18 to 24 months.
There are other substantive changes that enhance the utility and availability of these loans:
Simplified affiliation rules – The traditional EIDL affiliation rules are complex, confusing and, ultimately, a trap for the unwary. When Congress enacted RRF it created simpler affiliation rules for that program. The SBA has now adopted those rules for COVID EIDL.
Expanded eligibility – For certain hard-hit industries, the definition of small business has been changed. Those businesses will be eligible if they have no more than 20 locations and fewer than 500 employees per location.
Use of funds – In addition to covering normal operating expenses, EIDL proceeds may now be used to prepay existing commercial or credit card debt and pay monthly installments and deferred interest. The same (other than prepayments) is true for federal loans as well. Previously, loan funds could be used only for working capital to fund operations until they returned to normal. Funds still may not be used for business expansion.
The SBA is now processing applications only for loans of $500,000 or less. Applications for larger loans will be accepted on or after October 8,, 2021. The program is currently scheduled to sunset on December 31, 2021. All applications are to be completed on the SBA.gov portal. Borrowers looking for an increase to an existing loan are cautioned not to file a new loan application. There is a separate section of the portal devoted to increases.
On the other hand, there are still some potential drawbacks to being an EIDL borrower. The loans must be collateralized with assets of the business. There are restrictions on business reorganizations. Personal guarantees may be required. Also, borrowers with traditional EIDL loans were not permitted to make distributions to owners unrelated to the performance of services. While SBA has hinted that it might relax this restriction, it has yet to do so.
Your Friedman LLP advisor stands ready to help you decide if a COVID EIDL is what your business needs to keep pushing through the pandemic.