Answering small businesses’ questions about the Economic Injury Disaster Loan

With the Paycheck Protection Program having moved into the forgiveness stage, and plummeting personal consumption accounting for about a quarter of the country’s ghastly 32.9 percent drop in second quarter GDP, small business owners suffering the effects of America’s unnecessarily prolonged COVID-19 pandemic are still desperate for financial assistance.

Small businesses, including agricultural entities and non-profit organizations, can still apply for an Economic Injury Disaster Loan, made available by the Small Business Association as part of its COVID-19 response. Available for 30-year terms at a fixed rate of 3.75 percent for businesses and 2.75 percent for non-profits, EIDL funds are intended to be used to cover working capital and normal operating expenses, including rent, healthcare benefits, utilities, and debt payments. Unlike PPP loans, EIDLs are not forgivable.

Realizing that the EIDL program has received barely a fraction of the publicity PPP has, the National Federation of Independent Business hosted a webinar yesterday in which the group addressed its membership’s most pressing questions.

“If you still have a downturn in revenue, business restrictions, things just aren’t back to where they were,” said Elizabeth Milito, senior executive counsel for legal foundation at NFIB, “it might be a good idea to put an application in for an EID loan.”

Here are a few of the key questions addressed during the webinar:

I have both an EIDL and a PPP loan. Will the EIDL affect my PPP loan forgiveness?

The advance grant portion of the EIDL will affect PPP loan forgiveness, but the actual loan portion will not. Any EIDL advance grant received by a small business will be subtracted from its PPP loan forgiveness amount.

The advance grant for businesses, based on the number of people they employ, topped out at $10,000.

Milito gave as an example a business that received a PPP loan of $40,000 and spent it appropriately, qualifying it for 100 percent forgiveness. But that business also received a $5,000 EIDL advance because it has five employees. The SBA will subtract the EIDL advance from the $40,000 PPP total, leaving the business with a $5,000 PPP loan balance.

“Essentially, the advance grant will, for many of you, turn into a PPP loan,” Milito explained. “And I know that is not good news, and it’s taken a lot of people by surprise, but this was actually language in the CARES Act back in March. I don’t think banks and borrowers realized what a headache this is going to be.”

I used a credit card to pay my business’ operating expenses. Can I use EIDL funds to repay the credit card?

Milito said this is not a problem for business owners if the credit card was used to pay legitimate operating expenses. She discouraged business owners from using EIDL funds to pay off long-standing credit card balances, even if they were business-related, but charges accrued on any purchases made necessary by COVID-19 can be paid off with EID loans. 

“If your computer breaks, you can buy a new computer,” Milito said. “But you can’t buy ten new computers.”

How do I find out my EIDL status?

With tens of thousands of EIDL applications still awaiting processing, there’s no good answer for this one. The only options are either calling SBA directly at 800-659-2955 or sending an email to [email protected].

What happens if I cannot repay the EIDL? Am I personally liable?

For loans under $200,000, the SBA has waived the personal guarantee requirement. The Administration does, however, still require a pledge of collateral for loans over $25,000.

“It can impact the sale of your business, too, because it will be attached to the business. That’s something you will have to work out with the SBA,” Milito said.

Can I use EIDL funds to pay myself?

Yes, but an EIDL cannot be used for disbursements to owners or shareholders. An owner employed by the company can receive “reasonable compensation” for work performed on the company’s behalf.

Are there record keeping requirements involved?

Any business owner using EIDL funds is required to maintain “current and proper” business records. The records must cover the five-year period before the loan was administered and continue for either three years after the loan matures or until the loan is paid off in full, whichever occurs first.

Milito told attendees that the EIDL record-keeping requirements are not as onerous as those involved with PPP loans.

“Because it’s a loan and there’s no opportunity to apply for forgiveness, there’s no after-the-fact documents you’re going to need to file for forgiveness or to justify the expenses,” she said. “But you do want to have good record-keeping just in case you were to be audited by SBA and there was any question about how you spent the funds.”