With the dire economic contractions occasioned by the rapid spread of COVID-19 nationally and globally, many businesses are quickly running short of capital to make payroll, pay rent, cover other critical overhead and remain in operation. The U.S. Small Business Administration (SBA) is offering eligible small businesses and nonprofits suffering harm from the pandemic Economic Injury Disaster Loans (EIDL) for allowed working capital purposes. These loans are structured to support businesses with payroll employees, restocking inventory and other working capital needs consistent with the program. Note that this emergency lending program is separate and distinct from the SBA-guaranteed Payroll Protection Program (PPP) loans authorized under the CARES Act.

Update

Since the March 25 publication of our initial alert, there has been record-breaking demand for EIDL loans. We understand from the SBA’s website and other reports that the SBA has exhausted the available funds initially appropriated for EIDL loans. In response, on April 24, Congress passed and President Trump signed an interim coronavirus relief package that, among other things, further funded the EIDL program with $60 billion.

Specific Eligibility Requirements – Disaster Loan Program

Unlike the PPP loans mentioned above, the EIDL loans are not forgivable and must be repaid. The SBA will review an applicant’s credit history and will require a proven ability to repay the loan. The SBA’s diligence may be more lenient than commercial lenders, however. Each applicant must be a “small business” (including sole proprietorships, independent contractors and self-employed persons, and private 501(c)(19) nonprofit and veterans organizations) as determined by federal regulations and subject to the SBA’s own affiliation rules (which may include as “affiliates” owners that have a minority interest in a borrower but exert negative control in the form of vetoes or consent rights). Information to determine whether a business qualifies as a small business can be found here.

Terms of the Loans

• Amount: Loans will be available in amounts up to $2 million.
• Use of Funds: Loans will be available to pay fixed debts, payroll, accounts payable and other bills that cannot be paid because of COVID-19. Please note that these loans are not intended to replace lost profits and are not for expansion. The loans cannot be used for the same purpose as a PPP loan.
• Interest Rates: 3.75% for small businesses; 2.75% for nonprofits.
• Payments: Deferred for one year.
• Term: Determined on a case-by-case basis, based on each borrower’s ability to pay, up to a maximum of 30 years.
• Guarantee: For loan amounts greater than $200,000, the SBA may require guarantees.
• Collateral: Collateral will be required for loans greater than $25,000. Based on the SBA’s other disaster loan programs, we anticipate some flexibility in this requirement.
• Delivery of Funds: Targeted within five days after execution of loan documents, but has been taking much longer.

Terms of Advance Program

• Amount: Advance of up to $1,000 per employee, up to $10,000.
• Repayment: This advance will not have to be repaid.
• Delivery of Funds: Delivery of advanced funds is targeted within three days of a successful application.
• Application: Concurrent with underlying loan application.

Other SBA Loans

Applicants with existing SBA loans still can qualify for COVID-19 assistance; however, multiple loans cannot be consolidated. Moreover, the SBA has announced that deferments of existing SBA disaster loans will be implemented automatically, meaning those borrowers do not have to contact the SBA to request a deferment.

Refinanceable With CARES Act Payroll Protection Program Loans

The CARES Act allows SBA disaster loans to be refinanced with the proceeds of a PPP loan. The refinanced loan becomes subject to all the conditions and limitations of the PPP.

Restrictions Under Existing Commercial Loans

Many companies are already borrowers of loans or issuers of notes or other debt securities. The loan documents that govern this existing debt frequently contain covenants that restrict borrowers’ ability to incur additional debt, whether secured or unsecured. Companies also may be guarantors of their parent entity’s existing debt and may therefore be subject to the same restrictions. Financial covenants, permitted debt definitions, permitted investments and other terms of loan documents may need modifications to allow borrowers to access this government relief without technical defaults. Companies in this position should talk to their legal counsel and their lenders now about any necessary amendments or waivers of their loan documents to allow this or any other federal emergency loan. Many existing lenders will be supportive of these requests, and many may actually encourage their portfolio borrowers to apply for SBA support.

Necessary Forms

The following basic forms will be required during the application process:

• Completed SBA loan application (SBA Form 5; Form 5c for sole proprietors and home-based businesses).
• IRS Form 4506-T. This form must be completed and signed by each applicant business, each principal owning 20% or more of the applicant business, each general partner or managing member, and any owner who has more than a 50% ownership in an affiliate business. (Note that affiliates include a parent company, subsidiaries and/or businesses with common ownership or management.)
• Completed copies of the applicant’s most recent federal income tax return.
• Schedule of Liabilities (SBA Form 2202).
• Personal Financial Statement (SBA Form 413D). This form must be completed by each principal owning 20% or more of the applicant business or each general partner or managing member, if applicable.

The following set of forms will likely be requested during the application process and should be obtained prior to applying for a more streamlined process:

• Completed copy, including all schedules, of the most recent personal federal income tax returns for each principal owning 20% or more of the applicant business, each general partner or managing member, and each affiliate.
• If applicant businesses do not have completed 2019 business tax returns, submit a year-end profit and loss statement and balance sheet for 2019.
• Current year-to-date profit and loss statement.
• Monthly sales figures (SBA Form 1368).