Since covid-19 hit, many businesses have found themselves either bankrupt or on the verge of collapsing. Small businesses have been especially hard hit.
However, to safeguard the interest of small businesses, the federal government took action bypassing the CARES Act.
The CARES act enabled modification of a prior disaster loan program to create the Economic Injury Disaster Loan program (EIDL). The SBA EIDL has helped small businesses to enjoy financial aid during this unprecedented time.
Before it was enacted, the EIDL existed as a natural disasters loan program.
If your business needs a boost and you plan to apply for SBA EIDL loans, it’s advisable to understand the terms and conditions so you know what you are getting into, and how you can use the funds.
Understanding SBA EIDL loans
What is the SBA EIDL Loan Program?
SBA EIDL is a government program guaranteed and issued by the SBA that gives loans to small businesses that have been negatively affected by the pandemic. Small businesses can apply after suffering substantial economic damage in a disaster location within the US and its territories.
For your business to qualify for the SBA EIDL loans, you need to have suffered working capital losses during the covid-19 pandemic. A company should also be;
- Organized for profit
- Operates within the U.S. markets
- Pays taxes or uses American labor, materials, and products
- Independently operated and owned; and,
- On a national basis, it’s not dominant in its field
Understanding the Size Standards
According to the SBA, a business is considered small and therefore eligible for EIDL loans, if it has less than 500 employees. However, according to SBA size standards, some businesses with more than 500 employees may qualify, depending on the industry.
How can a Small Business Use SBA EIDL Loans?
SBA EIDL loans may be used for the daily operating expenses of the business. These may include;
- Purchasing supplies
- Marketing and advertising
- Fixed expenses such as rent
- Repaying the regular loan principles. Buying personal protective equipment
However, SBA EIDL loans cannot be used for:
- Physical expansion of the facility
- Physical repairs
- Bonuses and dividends
- Purchasing of fixed assets
- Refinancing of existing debts
- Federal agency or SBA debts, apart from tax obligations.
Furthermore, the SBA has additional limitations for those who have existing PPP loans, whereby the EIDL and PPP disbursements cannot be used for the same expense or purpose.
For example, you may choose to use the SBA EIDL funds for mortgage or rent payment and use the PPP loan to pay payroll expenses.
SBA EIDL Loans for the Self-Employed
Sole proprietors and the self-employed are eligible for SBA EIDL loans provided they were in business before February 2020.
However, to qualify for the EIDL, the SBA will need to establish the financial performance of self-employed people through bank statements and tax documents.
An EIDL proceeds for the self-employed covers:
- Commissions, wages, net earnings of the sole proprietor or employee (up to $100,000 for each)
- Retirement benefits
- Insurance premiums
- Employee benefits (sick leave, family, or vacation)
- Local and state taxes
What Businesses are Unqualified for SBA EIDL Loans?
The following businesses are NOT eligible for SBA EIDL loans;
- Businesses involved in illegal activities
- Adult entertainment
- Businesses that derive more than one-third of their annual revenue gross from legal gambling activities
- Cannabis and marijuana companies
- Life insurance companies
- Investment and lending companies
- Government-owned entities including municipal, local, or state government entities or an entity owned by a member of congress.
What are the SBA EIDL Loan Amounts and Terms?
SBA EIDL loans have the following terms and conditions;
- Amount: The maximum EIDL amount any business can apply is $2 million, however, the SBA will start accepting loans bigger than $500,000 on October 8, 2021.
- Interest rates: The interest rates for businesses are 3.75% fixed and 2.75% fixed for private non-profit organizations.
- Repayment: The maximum repayment term is 30 years, and during this time, you need to repay the amount, interest, plus any other applicable fees in full. The first payment is applicable 24months after receiving the loan (although you can start paying earlier). However, interest will accrue during the deferment period.
- Collateral: The loan package differs from business to business according to your situation. For loans above $25,000, you need collateral, and real estate is the most preferred collateral choice.
- Personal Guaranty: You will require a person for more than $200,000.
How to Apply for an SBA EIDL Loan
Now that you understand the requirements of an SBA EIDL loan, here’s how you can apply.
Visit the EIDL application page and fill out the requested information.
To check the status of your application, you can call the SBA customer service center. The EIDL loan application takes a minimum of about 21 days, and if approved, the SBA deposits the amount directly into your bank account.
Benefits of the SBA EIDL Program
- The application does not require a personal guaranty for amounts below $200,000.00, making it a great option for many small business owners.
- It’s possible to apply and receive an emergency loan of $10,000.00, which is entirely forgivable, even if you don’t qualify for EIDL.
- You do not have to prove your ability to obtain a loan from another lender to qualify for SBA EIDL loans.
- The interest rate for nonprofit organizations is a fixed 2.75% and 3.75% fixed for small businesses, with a long repayment period of up to 30 years.
- SBA EIDL loans do not have a prepayment penalty. You can start your repayments as soon as you can before the 24-month grace period is up.
SBA EIDL loans can revive your struggling business and help you to get back on your feet during this challenging time. You can take a loan of up to $2 million (starting 8th October 2021) with an extended repayment period of up to 30years and a grace period of up to 2 years.
Please apply for the SBA EIDL but remember repaying your loan on time means boosting your credit score while late payments may affect it, thus blocking future borrowing.
Author: Rita Paul