Client Alerts

SBA COVID-19 Economic Injury Disaster Loans and More

By: Alan W. Scheufler and Bradley D. Kaplan

About: Banking & Commercial Finance

SBA COVID-19 Economic Injury Disaster Loans – Overview

March 25, 2020 – Our state and federal governments are responding in many ways to help American businesses address the unique financial challenges caused by the current nationwide medical emergency.

The emergency loan program described below is only for businesses: 1) that qualify size-wise under the Small Business Administration’s Small Business NAICS classifications, and 2) do not have access to other credit. If your business does not qualify, please contact our Banking & Commercial Finance Practice Group to discuss other SBA loan programs or financing sources that may be appropriate for your situation.

The SBA has announced an Economic Injury Disaster Loan (EID Loan) to help address economic injury caused by the COVID-19 pandemic. Through this emergency loan program, the SBA offers loans directly to small businesses. As of the publication date, Congress is debating the CARES Act legislation, which currently proposes increased funding for this emergency loan program to help protect small businesses. This program includes the following details:

While there is very limited public information available about this new COVID-19 emergency loan program, the following is what we know as of the publication date of this alert.

Loan Purpose

These working capital loans may be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred. It provides relief from economic injury caused directly by the disaster and permits you to maintain a reasonable working capital position during the period affected by the disaster. We currently presume you could use the EID Loan to pay rent payments and other loan payments. No guidance has been provided regarding calculation of the amount of fixed expenses that will be allowed. However, the loans are NOT intended to replace lost sales, lost profits, or for expansion. EID Loans cannot be used to refinance long term debts.

You may request an EID Loan for the amount of economic injury and operating needs, but not in excess of what your business could have paid had the disaster not occurred.

Small Businesses and Economic Injury That May Qualify

Size of Business

The business must be a small business. Eligible businesses are determined based upon their size, type of business, and financial resources. Small business size standards are based upon NAICS industry classification. Depending on the industry, size standards may be based upon average annual revenues, average number of employees, or both. Click here to view the table of size standards by NAICS code.

Credit Criteria

The business must have a credit history acceptable to the SBA, and show an ability to repay the SBA loan. The applicant business must be physically located in a declared emergency county, and must have suffered working capital losses due to the COVID-19 disaster, not just due to a downturn in the economy or other reasons. All counties in many states already have been assigned the declared emergency designation.

Collateral Requirements

EID Loans over $25,000 require collateral. The SBA takes real estate collateral when available.  The SBA will not decline a loan for lack of collateral, but requires the applicant to pledge whatever collateral is available. You likely will need permission to grant the SBA a second lien on the same assets held as collateral for your existing bank loan.

Loan Size Awarded by the SBA

In determining the loan amount, the SBA will look at: a) the total of the business’ debt obligations; b) operating expenses that mature during the period affected by the disaster, plus the amount needed to maintain a reasonable working capital position during that period; and c) expenses you could have met and a working capital position you could have maintained had the disaster not occurred.

The SBA will look at the last three years of historical financial information (or if the business is newly started, the financial information available) to determine what the business could have paid if the disaster would not have occurred. The amount of your economic injury does not automatically represent the dollar amount of your loan eligibility. The SBA will evaluate the information you provide and determine the reasonableness of your loan request, and evaluate similarly situated businesses in the same category.

Eligible Industries

Examples of eligible industries include, but are not limited to: hotels, recreational facilities, charter boats, manufacturers, sport vendors, owners of rental property, restaurants, retailers, travel agencies, and wholesalers.

Examples of eligible nonprofit organizations include, but are not limited to: nursing homes, food kitchens, museums, education facilities, senior citizen centers, daycare centers, playhouses, community centers, shelters, rescue organizations, associations, etc.

Ineligible Industries

Ineligible industries include, but are not limited to: real estate developers; agricultural enterprises as defined in Section 18(b)(1) of the Small Business Act; religious organizations; charitable organizations, businesses considered hobbies, and government owned concerns; gambling concerns; and casinos and racetracks.

Affiliate Businesses – Additional Information

Affiliation with another business concern is based on the power to control, whether exercised or not. Such factors as common ownership, common management, and identity of interest (often found in members of the same family), among others, are indicators of affiliation. Power to control exists when a party or parties have 50% or more ownership. It may also exist with considerably less than 50% ownership by contractual arrangement or when one or more parties own a large share compared to other parties. Affiliated business concerns need not be in the same line of business. The calculation of a concern’s size includes the employees or receipts of all affiliates.

Action Items

If you believe your business may be eligible for a SBA COVID-19 EID Loan, click here to view a list of action steps.

Ulmer’s Banking & Commercial Finance Practice Group is available to provide you with strategic advice and counseling during these uncertain times. Please reach out to our attorneys if you have any questions about the SBA’s Economic Injury Disaster Loan Program.