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Economic Injury Disaster Loan

The 2020 COVID-19 pandemic has severely affected the economic structure of small businesses across the country. Small businesses are under severe financial pressure due to loss of revenue, increased operating costs and economic recession. To assist American businesses survive the current situation, the United States Government has introduced a Paycheck Protection Program (PPP) loan program and disbursed the funds under the pre-existing Economic Injury Disaster Loan (EIDL) program. The EIDL loan was originally designed to assist small businesses facing revenue losses due to natural disasters such as droughts, major storms and other unpredictable disasters. However, the EIDL loan program was activated to tackle the challenges presented by an unprecedented situation of the 2020 COVID-19 pandemic.

The purpose of the program is to ensure the operational effectiveness of companies across the country. The usage of the loan is restricted to companies meeting the definition of small business, nonprofit organizations and businesses operating in the agriculture sector.

What is the difference between a PPP loan and an EIDL loan?

The PPP loan is designed to help businesses in meeting payroll costs and the EIDL loan assists in meeting the working capital requirements of the business.  The PPP is a forgivable loan so long as forgiveness conditions are met. The EIDL loan is not forgivable but is subsidized with a low, 3.75% interest rate for corporations (2.75% for non profit organizations) and payback term of 30 years. Allowing companies to classify it on their balance sheet as a more favorable, long term liability.

May I still apply for the EIDL loan?

The deadline for application for the loan is December 21, 2020. However, lawmakers are expected to fund the program in 2021 for businesses who did not take advantage of the first application window. There might be changes in terms of the loan in the future including a 2nd draw, but at this time the EIDL is a one-time loan opportunity.

Is the EIDL loan forgivable or may become forgivable?

The loan is not forgivable as of December 2020. However, depending on the long term economic impact to businesses and their ability to repay the debts, Congress may revise the terms and forgive the loan in part or in full. Lawmakers have recently relaxed the PPP loan forgiveness terms within the National Defense Authorization Act as the pandemic has extended longer than expected. Ftuure favorable changes in the terms of both loans would not be unexpected.

How can I use the amount received under the EIDL loan?

The amount obtained under the EIDL loan can be used in managing normal daily operational expenses. For instance, paying creditors, rent, utilities, business operating expenses, professional fees such as charges for accounting and bookkeeping, legal, HR, marketing and other professional services.

How can not use the amount received under the EIDL loan?

Funds from the EIDL loan can not be used in financial investing activities of the business. Paying down credit cards, refinancing debt, acquiring other businesses, making dividend payments, repaying other loan obligations and acquisition of fixed assets are all examples of restricted usage.

What are the major concerns with EIDL loans?

Some business owners are concerned with restrictions brought by signing the EIDL loan. These restrictions lie in the area of dividend distribution, collateral requirements, lack of privacy and proving the substantial economic injury despite PPP loan in some cases.

Businesses are restricted from paying dividends irrespective of the fact that they might be generating sufficient profits to meet the requirements of the EIDL loan and dividend payments.

Further, approval of the loan requires collateral if the loan amount exceeds $25,000. Signing the SBA Collateral Agreement prevents the borrower from pledging collateral assets to any other lender and these assets can not be sold without written consent from SBA. However, inventory can be sold in the normal course of the business even if given as collateral.

Lastly, the freedom of Information Act, enumerated at 5 U.S.C. § 552 requires disclosure of the borrower information for public records. Additionally, due to the unpredictability of the COVID-19 Pandemic’s future impact on the economy, some business owners were concerned their industries may struggle to show severe economical injury, particularly if they have obtained a PPP loan.

Our remarks

The terms and conditions of the PPP loan are less restrictive than the EIDL loan. The PPP loan is designed to be forgiven without such restrictions on dividend distribution, collateral and proving economic injury. The borrower must go through the agreement or get a professional review before signing for the loan.

We provide professional services for the detailed review of all types of loan agreements. We help you in understanding the terms of the loan, collateral requirements, cost of capital, internal rate of return, project feasibility, pay-back strategies, forecasted cash flow to reflect changes by injection of the loan and restrictions brought by the loan for your business.  Our professional review ensures an independent assessment of the loan terms that helps you in making a decision.