Editor’s note: The EIDL program is reopened as of June 15, 2020. You can apply today through the SBA’s online portal.
Has your small business faced financial pressure due to the coronavirus pandemic? The U.S. Small Business Administration (SBA) has made disaster loans available for businesses in affected areas. Here’s how the loan works, who qualifies, how to apply, and how to get your loan forgiven if you default.
What is the SBA disaster loan program?
The SBA Economic Injury Disaster Loan (EIDL) loan program specifically serves people affected by natural disasters in the U.S. For COVID-19 relief, all small businesses, including sole proprietors and independent contractors, can apply.
How much can I borrow?
You can borrow up to $2 million if your business is physically affected by a disaster (such as COVID-19, or a hurricane, earthquake or some other form of economic injury). However, the media is widely reporting that the SBA has capped loan amounts to $150,000 due to overwhelming demand (though the SBA has not publicly confirmed this).
If you qualify, the interest rate for an SBA disaster loan is 3.75% for businesses, and 2.75% for non-profit organizations. SBA loans have fairly long terms—generally 15 to 30 years—in order to make them affordable for small businesses.
How can you spend your loan?
Your loan is meant to give you working capital to keep your business running during the pandemic. You can use it to cover payroll, make interest payments, pay rent—the SBA isn’t picky. Once you qualify for a loan, it’s up to you to decide how you use it to fill the gaps in your revenue.
If you have a PPP loan, you cannot use the EIDL to cover the same expenses.
Who qualifies for EIDL?
You can apply for an Economic Injury Disaster Loan (EIDL) if you can demonstrate that your business has suffered severe economic hardship because of the pandemic. You no longer need to be unable to obtain loans from elsewhere (this requirement has been waived).
Also, independent contractors who work for a separate business (eg. real estate brokers) can qualify if they’re able to prove they’re separate from that business (eg. the brokerage).
Currently, businesses in all U.S. states and territories are eligible to apply.
How to apply for an SBA loan
You can apply for a loan through the SBA’s Disaster Loan Assistance portal. The initial application has been streamlined, and requires no additional forms to be submitted.
Further reading: How to Fill out Your SBA Disaster Loan Application
The EIDL emergency grant
As part of your EIDL application, you can also apply for an EIDL emergency grant, which provides up to $10,000 that does not need to be repaid. It’s unclear how the SBA decides your grant amount, but it appears to be based on employee count. If you’re a sole proprietor, you can receive $1,000. If you have ten employees, you can receive up to $10,000. The grant will not need to be repaid, even if you are ultimately rejected for the SBA EIDL loan.
Once you apply, a loan officer will check your credit rating. Then they’ll check your income statements and tax returns to determine how badly your business needs the loan.
For loans over $25,000, the lender can require you post personal collateral. For loans under $25,000, you have the option of offering collateral if you believe it will increase the chances you’ll qualify for a loan, but the lender can’t request it.
That being said, the SBA won’t deny you a loan if you’re unable to come up with enough collateral; they’ll assess what you’re able to offer, and then take that as posted collateral.
After that, they’ll decide how much they’ll lend you.
Further reading: What is the $10,000 SBA EIDL Grant?
What can I spend the EIDL funds on?
EIDL funds are intended to be used for working capital expenses. Funds can be used to cover necessary day-to-day expenses that you would have normally been able to pay if your business was not affected by the disaster.
EIDL funds can’t be used to help expand the business or refinance debt. The following expenses are not eligible uses of the EIDL loan:
- Dividends and bonuses
- Disbursements to owners, except when directly related to performance of services
- Repayment of stockholder/ principal loans
- Expansion of facilities or acquisition of fixed assets
- Repair or replacement of physical damages
- Refinancing long term debt
What do I do after I’ve received the loan?
Once your funds are disbursed, the SBA will want to ensure that they aren’t being misused. Your EIDL loan agreement requires you to have accurate books for the most recent five years, and continue to keep good books until three years after your loan matures or it’s been paid off.
A bookkeeping service like Bench (that’s us) can help ensure your books are accurate and up to date. Learn more.
Further reading: Recordkeeping for Your EIDL Loan
How do I get my SBA disaster loan forgiven?
The SBA Disaster Loan is not forgivable in the way that the PPP loan is. A more accurate way to state it would be that the SBA can choose to “forgive” your loan under very special circumstances, such as you not being able to pay the loan back. But loan forgiveness is not baked into the loan terms like it is with the PPP.
That being said, here is the way SBA loan forgiveness has typically functioned up to this point:
First, your business needs to shut down and dissolve. The SBA does not forgive the debt of businesses that are still in operation.
Once the bank has determined you won’t be able to pay back your loan, the SBA will step in to work with them.
The SBA will pay off 50-75% of your debt to the bank.
At this point, you can offer to pay off as much of the remainder of the loan to the SBA as you can. They can choose to accept or deny this offer.
If the SBA accepts your offer, they’ll set up an arrangement with you so you can pay back the loan in a timely manner.
After they pay off 50-75% of it, if the SBA doesn’t accept your offer to pay a portion of the remainder, they may move on to collection actions.
They’ll either use the Treasury Offset Program (TOP), or send you to the Fiscal Service department.
With TOP, any future tax refunds owed to you by the federal government will be taken to cover your debt to the SBA.
With Fiscal Service, the SBA may hire debt collectors, send collection letters, forward information to credit agencies, garnish wages, or even bring your debt to the Department of Justice to seek criminal prosecution.
Contacting the SBA
To get in touch with the SBA’s disaster loan customer service center, email firstname.lastname@example.org, or phone (716) 843-4100.
Other COVID-19 resources
- Recordkeeping for Your EIDL Loan
- What Can I Spend EIDL Loan On?
- EIDL vs PPP: The Breakdown
- How the PPP, EIDL, and PUA Work Together
- The EIDL for Sole Proprietors and Self-Employed
- The Top (Lesser Known) COVID-19 Relief Resources
- Paycheck Protection Program: A Simple Guide
- How to Calculate Your PPP Loan Amount
- Unemployment Benefits and the CARES Act
- COVID-19 Resources for Small Businesses, State by State