This Client Alert is issued as part of a series of related alerts on important loan programs and loan program changes enacted through the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. In response to this historic legislation, FTLF issued a Client Alert [found here] where we discussed two important loan programs under the CARES Act: (i) the Paycheck Protection Program; and (ii) Department of Treasury loans for mid-sized non-profits and businesses.
In addition to implementing the Small Business Administration’s (“SBA”) Paycheck Protection Program and new Department of Treasury loans for mid-sized nonprofits and commercial entities, the CARES Act made important changes to the SBA’s Economic Injury Disaster Loan (“EIDL”) Program, authorized under Section 7(b) of the Small Business Act, and authorized new low dollar value Emergency EIDL grants. The CARES Act provides the SBA with $562 billion for Section 7(b) Disaster Loans and $10 billion for Emergency EIDL grants.
As with the Treasury Department loans for mid-sized entities, these EIDL loans and associated grants may be an effective means of mitigating economic hardship for entities that are not eligible for Paycheck Protection Program loans. This client alert provides an overview of each.
Economic Injury Disaster Loans and Emergency Grants under Section 7(b) of the Small Business Act and Section 1110 of the CARES Act.
The EIDL program under Section 7(b) of the Small Business Act is not a new program. However, the CARES Act expanded the program for the current emergency, (i) expanding eligibility for EIDLs; (ii) authorizing emergency EIDL grants up to $10,000; and (iii) relaxing some of the traditional EIDL program requirements. Key elements of these new authorities and flexibilities are described below.
- Is my organization eligible for an EIDL?
To qualify for an EIDL, the applicant must have suffered a “substantial economic injury” as a direct result of a declared disaster. In response to the COVID-19 pandemic, COVID-19 EIDL disaster declarations have been made for all U.S. States, Washington D.C, and territories. Accordingly, all borrowers who meet eligibility requirements in these adversely affected areas may apply for EIDLs and emergency grants.
Additionally, the SBA must have a reasonable assurance that the borrower can repay its loan. Generally, this second element is evaluated in the loan application process by the SBA.
While historically small business concerns, private nonprofit organizations (regardless of size), and small agricultural cooperatives were eligible for EIDLs, the CARES Act expands eligibility for EIDLs during a designated covered period of January 31, 2020 to December 31, 2020 to include (i) any business, any cooperative, Employee Stock Ownership Plan (“ESOP”) or tribal small business concern with not more than 500 employees; and (ii) individuals who operate under a sole proprietorship, with or without employees, or as an independent contractor.
- What is an Emergency EIDL Grant and are we eligible?
The CARES Act provides $10 billion to the SBA for emergency EIDL grants. EIDL applicants can request emergency grants for up to $10,000 while their EIDL applications are being processed, with funds, at least in theory under the new legislation, being made available within days of a successful application. Further, unlike the EIDL itself, this grant does not have to be repaid, even if the applicant’s loan application is declined.
Borrowers can use the emergency EIDL grant for such things as (i) providing paid sick leave to employees unable to work due to COVID-19; (ii) maintaining payroll to retain employees during business disruptions or substantial slowdowns; (iii) meeting increased costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chains; (iv) making rent or mortgage payments; and (v) repaying obligations that cannot be met due to revenue losses.
- What can the EIDL be used for?
EIDLs may be used for, among other things: (i) paying fixed debts; (ii) payroll expenses; (iii) accounts payable; (iv) rent and utilities; and (v) other bills that could have been paid had the disaster not occurred.
However, you may not use the loan to, among other things: (i) refinance indebtedness which you incurred prior to the disaster event; (ii) make payments on loans owned by another federal agency (including the SBA) or a Small Business Investment Company (“SBIC”) licensed under the SBA; and (iii) pay dividends or other disbursements.
Borrowers that “wrongfully misapply” EIDL proceeds will be liable to the SBA for one and one-half times the proceeds disbursed as of the date the SBA learns of the wrongful misapplication. In addition, borrowers could face criminal prosecution or civil or administrative action. In this context “wrongful misapplication” means the willful use of any loan proceeds without SBA approval contrary to the loan authorization.
Eligible borrowers may borrow up to $2,000,000 and may request an increase in the amount of the EIDL in certain circumstances. Ultimately, the SBA will determine your loan amount on actual economic injury suffered as a result of the COVID-19 disaster.
- Will our EIDL be forgiven?
Unfortunately, the answer is generally “no”. Unlike the Paycheck Protection Program, EIDLs will not be forgiven; though the EIDL grant, while small in amount, does not have to be repaid.
Note that certain EIDLs and Paycheck Protection Program loans are designed to work in tandem. Specifically, if you received an EIDL between January 31, 2020 and April 3, 2020, you may apply for a Paycheck Protection loan. If your EIDL was used for payroll costs, your Paycheck Protection Program loan must be used to refinance your EIDL. The proceeds from any emergency EIDL grant or advance, up to $10,000, will be deducted from the total amount of the Paycheck Protection Program loan. If your EIDL was not used for payroll costs, it does not affect your eligibility for a Paycheck Protection loan.
- What is the interest rate?
The interest rate for non-profits is 2.75% and 3.75% for small businesses.
- How do we apply for an EIDL and an emergency EIDL grant under Section 7(b) of the SBA?
Applicants can apply for EIDLs and Emergency grants directly through the SBA here.
- Do we have to first try to obtain credit elsewhere before applying?
No. The CARES Act has waived this requirement for both the Paycheck Protection Program and for EIDLs.
- Will we have to provide a personal guarantee to be eligible for an EIDL?
Unlike the Paycheck Protection Program, the CARES Act does not waive the personal guarantee requirement in its entirety. However, personal guarantees are only required for EIDLs in excess of $200,000.
- Will we have to provide collateral to be eligible for an EIDL?
Most likely yes. While the CARES Act expressly waived collateral requirements under the Paycheck Protection Program, the CARES Act does not expressly waive the collateral requirements for EIDLs. As such, it is likely that collateral will be required for EIDLs in excess of $25,000.
- When must we pay back the loan?
The term of the loan is determined by the SBA and is specific to each borrower’s financial condition, with a maximum loan term of 30 years. EIDL loan payments may be deferred for up to 1-year, however, it is likely that interest would continue to accrue during the deferral period.
- What do I have to submit with my application?
According to the CARES Act, lenders may approve loans based solely on an applicant’s credit score and may not require an applicant to submit a tax return or a tax return transcript. However, we recommend that applicants check with the SBA regarding what forms will be required when applying for an EIDL, as guidance on this continues to develop.
- Am I eligible for an employment tax credit under Section 2301 of the CARES Act if I receive an EIDL?
As you recall, Section 2301 provides for certain employment tax credits for businesses that fully or partially suspend operations pursuant to governmental orders and, as a result, suffer a decrease in gross receipts of at least 50 percent for a calendar quarter as compared to 2019.
Section 2301 of the CARES Act expressly states that an entity may not receive such a tax credit if it receives a loan under the Paycheck Protection Act. As such, it appears that these tax credits are still available for EIDLs borrowers.
While many health centers, community-based organizations, and other businesses continue to find themselves in difficult financial situations due to the COVID-19 health emergency, EIDLs and emergency EIDLs grants are yet further tools in your ever-growing toolkit.
For more information on EIDLs and emergency EIDL grants, please do not hesitate to contact FTLF attorneys:
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Webinar: On April 16, 2020 at 1 PM ET, FTLF is hosting a webinar explaining the new loan programs, including answers to your questions on eligibility, applications, allowable uses, and requirements for loan forgiveness. Learn More or Register Here.
 The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, H.R. 748, available here.
 In Section 1110 of the CARES Act, it appears that the terms “grant” and “advance” are used interchangeably.
 13 C.F.R. § 123.300 (“[S]ubstantial economic injury is such that a business concern is unable to meet its obligations as they mature or to pay its ordinary end necessary operating expenses.” The SBA does not consider “[l]oss of anticipated profits or a drop in sales” a substantial economic injury).
 13 C.F.R. § 123.6. Absent any further SBA guidance, it does not appear that this requirement has been waived.
 Small business concerns are eligible for EIDLs even if they have more than 500 employees, as long as they meet the definition of a “small business concern” at 15 U.S.C. § 632 and the applicable size standards for the industry in which it operates; or meet the “alternative size standards” at 15 U.S.C. § 632(a)(5). For a list of size standards for particular industries, please reference 13 § C.F.R. 121.103.
 As defined by 15 U.S.C. 632.
 While the CARES Act is not clear on this point, it appears that in calculating number of employees, standard SBA affiliation rules would apply. For purposes of determining whether a concern or entity is an affiliate of each other, please refer to 13 C.F.R. § 121.301. Moreover, unlike the Paycheck Protection Program, the CARES Act does not waive the affiliation rules for certain industries for EIDLs. In addition, while also not clear from the statute, it appears, absent any formal guidance from the SBA, that the SBA would not consider independent contractors employees.
 CARES Act § 1110.
 13 C.F.R. § 123.303.
 13 C.F.R. §123.9.
 13 C.F.R. § 123.19.
 CARES Act § 1110.
 13 C.F.R. § 123.11. While collateral, such as a lien or security interest in the business property, is likely required for EIDLs in excess of $25,000, absent further SBA guidance, the SBA will not decline a loan if you lack a particular amount of collateral as long as the SBA is reasonably sure that you can repay your loan amount.
 CARES Act § 1110.