Note: This information is current as of 9:00 a.m. on March 25, 2020.

The Small Business Administration’s Economic Injury Disaster Loan Program (EIDL) is providing up to $2 million in long-term disaster-relief loans to qualifying small businesses for economic injury suffered due to the COVID-19 pandemic. Although this may be an attractive financing option for many small businesses that have been severely impacted by the crisis and need an infusion of working capital to survive, it is important for business owners to fully understand the implications of borrowing under the EIDL program, especially as it relates to personal guaranties, home mortgages, and pledges of personal assets. We have spoken with many business owners who determined that this program is not the best option for them as they learned more about the details.

Generally speaking, the EIDL loans are designed to provide emergency financing to affected small businesses “where credit is not available elsewhere.” To date, the SBA has not provided clear guidance on exactly how to interpret this requirement. On one hand, we do not believe that borrowers need to fully advance on line of credit and other loans that are already in place for difference purposes. On the other hand, the SBA may deny the loan application to the extent that the owners of the business have significant personal liquidity or personal resources to draw on.

Whether a business qualifies as a small business depends on factors such as the business industry, its size, and/or its revenues (see below for more details on qualifying small businesses). If eligible, the SBA evaluates the demonstrated impact of the COVID-19 pandemic on the business and its other possible sources of capital. The application requires any person owning 20% or more of the business, as well as managing members of any LLC and any partnership or the applicant if a sole proprietorship, to provide personal financial statements. Whether the SBA will provide financing and at what amount may depend on the owner/individual’s available liquid assets and ability to provide capital to keep the business solvent. EIDL loans in excess of $25,000 require a pledge of any and all collateral appearing on a principal owner’s personal financial statements – including a personal guaranty and mortgages on real estate in which the owner has significant equity, including any personal residence.

The following FAQs provide information about qualification and the application process. For more information from the SBA:

• Click here to access SBA resources and apply online
• Click here to download the SBA’s guide, “The Three Step Process: Disaster Loans”

DOES MY BUSINESS QUALIFY?

First, your business must qualify as a small business. Size requirements vary by industry and are usually determined by your number of employees or average annual receipts. For information and tools to determine the size of your business, visit the SBA’s “Table of Size Standards”.

Second, you must be able to demonstrate that the COVID-19 pandemic is the result of your economic injury or hardship and demonstrate how you expect it to continue to impact your business, especially for the next six months. Most eligible businesses should be able to easily satisfy this requirement.

IS THIS THE BEST OPTION FOR MY BUSINESS?

If your business is experiencing financial hardship due to the COVID-19 pandemic and has exhausted other potential sources of capital, the EIDL may be right for you. However, as noted elsewhere in this Alert, you should give careful consideration to the personal collateral requirements.

HOW MUCH CAN MY BUSINESS BORROW?

The SBA will determine the exact amount you can borrow based on cash flow projections and demonstrated need, up to $2 million, with the goal being to keep your business solvent. As stated above, the loan amount may also depend on factors including the financial position of the principal owners of the business.

We recommend providing as much financial detail as possible as part of the loan application and, if possible, being very specific about the amount you are seeking to borrow, with corresponding projections showing why this amount is necessary for you to be able to pay your bills and make payroll in the ordinary course of business. Practically speaking, with millions of applications pouring in over the next few weeks, it seems unlikely that the SBA’s loan officers will have the bandwidth to critically scrutinize your application and challenge any reasonable assumptions included in your financial projections. In short, you want to give the loan officer reasons to say “yes” instead of reasons to say “no.”

WHAT ARE THE LOAN TERMS?

EIDLs are underwritten, administered, and serviced directly by the SBA. Term length is either 15 or 30 years. We have received guidance from the SBA that the “default” term is 15 years, but that it may be extended to 30 years if the business demonstrates that is needs to minimize its monthly P&I payments under the loan. Current interest rates are 3.75%, but may change as the program continues to evolve. If interest rates go down, the expectation is that the reduced interest rate will apply retroactively to all borrowers under the program.

Borrowers can defer principal and interest payments for the first 11 months of the loan, with the first payment becoming due 12 months from the loan date. It is not expected that any portion of the loan will be forgiven. There are no prepayment penalties.

ARE THERE RESTRICTIONS ON HOW THE LOAN PROCEEDS CAN BE USED?

Funds can be used only to pay expenses that arise in the ordinary course of business, not for expansion, development, CapEx items, or other similar projects. Loan proceeds also may not be used to pay down long-term liabilities, refinance existing debt, or make distributions or other payments to owners. You will need to keep track of how you used the proceeds for 3 years in case of an SBA audit.

WHAT ARE THE COLLATERAL REQUIREMENTS?

The SBA is very clear that any loan greater than $25,000 will be secured by the assets of the business and the personal assets of the principal owners of the borrower. Although the SBA will not deny a loan for lack of collateral from the principal owners, to the extent that the owners have material personal assets that appear on their personal financial statement(s), the SBA will likely seek a security interest in those assets. This will include a personal guaranty and may also include a mortgage on your home or any investment properties, and/or a pledge of any other valuable assets. It is very important to carefully think through the legal implications of satisfying these personal collateral requirements, especially in light of the current economic climate.

In addition, if the business is owned by another business or entity, the SBA will require a personal financial statement (and corresponding pledge of personal assets) from the individual(s) who ultimately own the business.

HOW DO I APPLY?

Applicants can find more information at https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources and apply online at https://disasterloan.sba.gov/ela or by phone at 1-800-659-2955 through the SBA Customer Service Center.

HOW LONG UNTIL APPLICATIONS ARE PROCESSED AND FUNDS ARE AVAILABLE?

Current processing and funding time is around three weeks after application, with expectations of a dramatic increase in processing times as application numbers continue to grow. We have heard that millions of applications have been submitted in the past few days alone.

WHAT IF I NEED THE MONEY NOW?

We have spoken to several commercial banks (including several of our banking clients) who may be willing to provide short-term bridge loans to eligible businesses that have applied for an EIDL but are still waiting for it to be funded. We would be happy to connect you with the right people if you’d like to explore this further.

CONCLUSION

If an EIDL appears to be right for your business, it is advisable to apply as soon as possible and provide as much information as possible to help the loan officer quickly evaluate and approve your application. If funded, your business can decide whether to proceed based on the EIDL offer and terms.

Note to Minnesota businesses: Qualifying Minnesota small business applicants may also apply for the Small Business Emergency Loan Program for emergency relief loans from $2,500-$35,000. More information is available here: https://mn.gov/deed/business/financing-business/deed-programs/peacetime/.