Economic Injury Disaster Loans
Economic Injury Disaster Loans and what you need to know!
By Mack Bekeza, CFP®
With entrepreneurs and small business owners agreeing that the SBA’s loan programs in response to COVID-19 can be confusing, we at MWM believe that we should clarify the process as much as possible. Since we already talked about the PPP (Payroll Protection Program), we are now going to discuss what we believe is the second most important loan program to combat COVID-19, the Economic Injury Disaster Loan.
If you are considering applying for the EIDL, we have answered the most typical questions one would ask about the program.
What is the purpose of this loan?
One of the preexisting programs before COVID-19, The EIDL was designed to provide financial assistance to organizations that have suffered a significant economic injury as the result of a declared disaster (such as COVID-19), whether or not an applicant has suffered any physical damage. With the Federal Government expanding this program, applicants of an EIDL may receive a grant of up to $10,000, even if the SBA denies your application. The EIDL might come in handy for someone who has applied for the PPP and would like additional assistance.
An EIDL is used to provide capital for expenses such as payroll, rent and mortgage payments, equipment leases, and other accounts payable. The EIDL covers up to six months of operational costs as opposed to the PPP, only covering up to eight weeks.
However, if you are planning to use this loan to refinance long-term debt, acquire fixed assets such as equipment, or to provide capital for executive and or shareholder compensation, the SBA states that all of that is prohibited!
Who can apply for an EIDL?
- Sole Proprietors
- Independent Contractors
- Gig-Economy Workers
- Self Employed Individuals
- Most Businesses with less than 500 employees
- Non-Profit organizations
It is important to note that you will be eligible for the loan if you or your organization was in business before January 31st, 2020.
But to find out for sure if you are eligible, the SBA has provided an eligibility checker to see if your business or Non-Profit qualifies for an EIDL.
When do I need to apply?
The application must be submitted by December 16th, 2020, a notable leniency compared to the PPP’s application deadline of June 30th, 2020.
How much can I borrow?
The SBA has set the maximum borrowing amount to $2 Million. However, the loan amount that you will receive will be determined by your “actual economic injury,” less any financial recoveries from things such as insurance proceeds.
How long can the loan last?
An EIDL can have a maturity of up to 30 years. Loan payments can be deferred up to one year after the loan origination date.
What is the interest rate?
The interest rate for EIDLs for COVID-19 is 3.75% and 2.75% for Non-Profits. Significantly higher than the PPP’s 1% interest rate; however, the interest rate is higher due to the extended maturity date.
How much does it cost to apply?
The SBA will not charge a fee to apply. However, you may have to pay a financial professional such as an accountant or tax professional to assist you in applying.
How do I calculate employees for the EIDL?
Fortunately, the Legal Information Institute has broken down how the SBA calculates the number of employees.
Do I need to provide collateral?
If the loan is less than $25,000, you will not need to provide collateral.
What about a personal guarantee?
The SBA has waived personal guarantees for loans up to $200,000. However, that will only last until December 31rst, 2020.
Did I see something about getting a Grant!? How does that work?
The EIDL program does offer applicants a Loan advance of up to $10,000 that can be sent in as little as three business days of applying. The Loan Advance is not owed back as long as you use it for the following:
- Paid Leave
- Maintaining Payroll
- Mortgage or Lease Payments
If you can do that, then you just received a grant from the SBA! Just remember to check the box that lets the SBA know you want an advance on the application!
Can I coordinate this loan with a PPP Loan?
Yes! As long as you coordinate them with different forms of expenses. For the best guidance on doing this, speak to your accountant/CPA before attempting to do this.
How do I apply?
Compared to the PPP, you will have to apply directly with the SBA. Fortunately, they have a streamlined online application that can be done in under 10 minutes.
Please note that you must have your “books” in order if you are applying since they ask for items such as gross revenue and costs of goods sold for the past year, most people can use what these were for 2019. Speak with your CPA/Accountant to confirm any items the application asks you!
Once the application is received, you will receive your advance in as little as three days, the application is processed within 18-21 days and the loan itself is dispersed within two to five days of approval.
One last thing, MWM is giving away FREE, one-hour intensive sessions to any entrepreneurs or individuals that have been directly impacted by COVID-19. We will cover any topics that can be addressed in a one-hour time frame with guidance and direction on what steps you should take to reach your short or long-term financial goals. No obligation or hidden costs. We want to make sure you are in the best financial place in these uncertain times. Respond to this post or message us to schedule your FREE one-hour intensive.