As part of both the CARES Act passed on March 27 and the Paycheck Protection Program and Health Care Enhancement Act passed on April 23, Congress provided funding to the Economic Injury Disaster Loan (EIDL) program and made changes to the program to allow businesses impacted by the coronavirus to apply for EIDLs. The purpose of the EIDL program is to enable small businesses impacted by COVID-19 to meet financial obligations and operating expenses that could have been met had the COVID-19 disaster not occurred. The EIDL program existed prior to the CARES Act but was expanded as part of Congress’s response to the COVID-19 pandemic. As of June 12, the Small Business Administration reports that it has approved 1,332,955 EIDLs totaling nearly $91 billion.
The EIDL program provides small businesses and nonprofit entities with low-interest loans. Although Congress provided for a $2 million maximum loan amount, the SBA has announced it has imposed a maximum loan amount of $150,000. Terms of EIDLs are generally 30 years with a 3.75% rate for most applicants and a 2.75% rate for nonprofit entities. During the application process, an applicant can apply for an emergency EIDL grant of up to $10,000 ($1,000 per employee, up to $10,000). While the EIDL itself is not forgivable, any emergency EIDL grant need not be repaid.
Due to high demand for the EIDL program, the SBA is no longer accepting COVID-19 related EIDL applications except for applications from agricultural businesses. Applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.
Now that the SBA has begun distributing loan documents to EIDL loan recipients, here are a few things borrower should keep in mind:
Phishy-Seeming Electronic Correspondence from the SBA
In the last few weeks, the SBA has begun sending email communications to EIDL applicants confirming the dollar amount of the loans and providing application numbers. Due to the impersonal nature of the emails, their automated appearance, and the lag time between the time that borrowers submitted their EIDL applications (some as early as March) and the receipt of these emails (in June), many borrowers have wondered whether the emails were genuine or some type of phishing attempt.
The SBA warns against phishing attempts on its website and cautions applicants to pay special attention to their application number on any correspondence from the SBA.
EIDL Interaction with Paycheck Protection Program
Although no explicit language in the CARES Act or subsequent amendments prohibits a borrower from receiving both a PPP loan and an EIDL loan simultaneously, SBA published regulations provide that using EIDL loan funds for payroll costs could affect eligibility for a PPP loan. In light of the SBA’s guidance, we recommend that any borrower who receives both types of loans create separate accounts to segregate the proceeds of each loan and prevent commingling of the funds, keep detailed records of all expenditures of loan funds, and do not use any EIDL proceeds to cover forgivable payroll costs under the PPP loan program. For more details on the PPP program and forgiveness, see our recent client alerts.
Small Business Requirement
Among other requirements for receiving an EIDL, an applicant must qualify as a small business. In general, this means the business must either (a) meet the existing SBA size standard specific to its particular industry (the pre-CARES Act definition of small business) or (b) employ 500 or fewer employees (CARES Act expansion of definition of small business). Some of the industry-specific SBA size standards are based on employee headcount (generally ranging from as low as 100 to as high as 1,500), some are based on average annual revenues, and some are based on average assets. If a business does not meet the 500 or fewer employee headcount test from the CARES Act, it may still be able to qualify if meets its SBA-size standard, even if that size standard is employee headcount.
Loan Document Terms
EIDL documents circulated by the SBA should be carefully reviewed because there may be obligations in the documents which the borrower did not expect or which could impact the borrower’s ability to comply with the EIDL or require repayment earlier than expected. EIDL documents have generally provided for a 30-year repayment term, a fixed annual interest rate of 3.75% (2.75% for nonprofit entities), and no personal guaranties.
Pledge of All Assets
While EIDLs of less than $200,000 do not require any personal gurantees, loans in excess of $25,000 are nevertheless secured by a blanket pledge of all assets of the borrower. For those with an existing line of credit or other secured loan, the EIDL could trigger a technical default under the borrower’s existing loan agreements. It is important that borrowers communicate with their existing lenders about their application for an EIDL.
SBA Permission Needed to Sell Many Assets (Vehicles, Furniture, Equipment, Computers)
EIDLs require SBA approval for the sale or disposal of any assets other than inventory in the ordinary course of business. Since this is an “all assets” pledge, that means that, for the next thirty years, borrowers are technically required to obtain SBA approval before retiring old computers, furniture, tools, equipment, or vehicles. Thirty years is a long time and it remains to be seen how the SBA plans to enforce these loan provisions.
SBA Required Hazard Insurance on All Assets
Borrowers are required to maintain hazard insurance covering all assets up to 80% of the value of the assets and provide proof of such insurance to the SBA. Borrowers must maintain this insurance for the full term of the EIDL.
Future Loans Must Repay EIDL
If a borrower later receives a loan from another source, it must use those loan funds to retire the EIDL, so borrowers should not think of EIDL funds as being “in addition to” other later loan sources. Although the SBA has not povided guidance on what loans are covered by this repayment obligation, any form of financing outside the normal course of business is likely covered. The repayment obligation may also cover intercompany loans from a related party.
These terms in the loan documents may come as a surprise to many borrowers, depending on current or planned activities. We urge all borrowers to carefully review the terms of their EIDLs as well as any existing loands. We also recommend seeking advice and counsel from an attorney regarding your loans.
Tracking Updates to the EIDL Program
We have a team of people at Parker Poe who continue to track developments with the EIDL program and the CARES Act . For more information, please contact us or your regular Parker Poe contact. You can also find our other COVID-19 related alerts here.