The target is for SBA to arrive at a decision within two to three weeks of application submission, but this is dependent on volume.
The U.S. Small Business Administration (SBA) is offering low-interest, long-term loans to small businesses in states and territories of up to $2 million each to provide assistance to businesses located in a declared disaster area as a result of the coronavirus (COVID-19) pandemic. These loans are called “Economic Injury Disaster Loans” or EIDLs. These loans are intended to provide relief from substantial economic injury caused directly by the disaster to fund working capital needs and help small businesses survive until normal operations resume after a disaster.
This Alert reviews key “nuts and bolts” aspects of the application process for these loans.
Tips for Applying
- Apply Early—Loans are being awarded on a first-come, first-served basis.
- Apply Online—You can file online or by submitting a paper application available for download. Online applications are likely to get processed faster. In order to apply online, a representative of the business will need to register (and provide their social security number). There is no cost to apply.
- Be Prepared for Delays—Given the volume of applicants, the online application process can be slow. Consider completing the application on off hours and/or completing it in parts.
- Have Information Ready—The following forms need to be submitted with your application:
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Information |
For who? |
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Business Loan Application—SBA Form 5C for sole proprietorships; SBA Form 5 for all other business organizations |
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Tax Information Authorization—IRS Form 4506-T |
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Copy of most recent tax return—if not available, provide explanation and year-end profit and loss statement and balance sheet for that tax year |
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Personal Financial Statement—SBA Form 413 |
For sole proprietorships:
For other business organizations:
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Schedule of Liabilities—SBA Form 2202 |
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Other Information |
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After Applying
The target is for SBA to arrive at a decision within two to three weeks of application submission, but this is dependent on volume. If your business passes credit verification and other financial review, your business will be assigned a loan officer who will determine eligibility and will contact you with results. If awarded, loan closing documents will be sent for signature and once completed/signed, first disbursement to be made within five days. Loan amount subject to increase/decrease based on changed circumstances.
Loan Features
- Funding Source—Unlike other SBA loans, the EIDLs loans are funded through the U.S. Treasury, not a bank.
- Key Economic Terms—Borrowings for up to $2 million; 3.75 percent interest for small businesses (2.75 percent for nonprofits); loan term up to 30 years.
- Collateral—Required for loans of more than $25,000.
- Personal Guaranty—Historically required for standard SBA loans, so very likely to be required for EIDLs.
- Use of Proceeds—Funding of ordinary-course working capital needs (e.g., payroll, fixed debts, accounts payable) and cannot be used to replace lost sales or for expansions.
Eligibility Requirements
- Location Requirements—Your business must be located in a “declared” disaster region. The SBA website keeps a current list of these regions. Tangible, physical presence is necessary; economic ties to a region is not sufficient.
- Cash Crunch—Your business must be suffering working capital losses due to the disaster. Financial hardship caused instead by general downturns in the economy or other reasons will not be sufficient. Additionally, SBA requires financial information on stakeholders (see above) to evaluate other possible financing sources, including major owners, that may be available to the business applicant for purposes of assessing need.
- Credit Worthiness—Your business must have a satisfactory credit history. SBA will also review the materials submitted to evaluate whether the business applicant has the ability to repay.
- At Least One Year in Business—Need to be in business more than a year before the disaster.
- Small Business—Your enterprise must qualify as a small business under the Small Business Act.
- Ineligible Business Types—Agricultural enterprises, religious and charitable organizations, gambling concerns, casinos and racetracks are ineligible, as are others noted on the SBA website.
Alternatives
Businesses that are not eligible for, or interested in, the EIDLs can apply for standard SBA loans through their local bank. In addition, the CARES Act will be providing additional loan opportunities through the SBA. Duane Morris will be providing further details.
About Duane Morris
Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.
For Further Information
If you have any questions about this Alert, please contact Sandra G. Stoneman, Nanette C. Heide, any of the attorneys in the Private Equity Group, any of the attorneys in the Emerging Businesses Group, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.