Getting Payment Relief Through the SBA Economic Injury Disaster Loan Program

The COVID-19 pandemic has been financially devastating for many small businesses. With revenues plummeting while fixed costs remain, it can be incredibly difficult to keep up with expenses like rent, utilities, payroll, and vendor bills. If this sounds familiar, you may be wondering what options exist for getting some payment relief until business picks back up. One potential lifeline is the Economic Injury Disaster Loan program from the Small Business Administration (SBA).

What Is an Economic Injury Disaster Loan?

An Economic Injury Disaster Loan (EIDL) is a low-interest federal loan offered by the SBA to provide working capital funds to small businesses suffering substantial economic injury due to a declared disaster. It can be used to pay fixed debts, payroll, accounts payable, and other expenses that could have been paid if the disaster hadn’t occurred. The COVID-19 outbreak qualifies as a declared disaster, so EIDLs are available to eligible businesses negatively impacted by the pandemic.

These loans are very flexible in how the funds can be used, making EIDL an attractive option for many struggling small business owners. The SBA reports that over 3.7 million EIDL loans have been approved during COVID-19, totaling $197 billion in relief funds.

Who Qualifies for an Economic Injury Disaster Loan?

To be eligible for an EIDL, you must meet the SBA size standards for a small business, be located in a declared disaster area, and suffer working capital losses due to the disaster itself (not due to a downturn in the economy or other reasons). Your business must have also been operating when the declared disaster took place.

For COVID-19, any state or territory with confirmed cases qualifies as a declared disaster area. So virtually every small business in the country is eligible if they have suffered losses due to the pandemic.

Self-employed individuals like independent contractors and gig workers can also qualify for these loans under relaxed rules during COVID-19. The SBA has declared economic injury to be the default for small businesses and non-profits in every state, so you do not have to prove actual injury.

Some non-profits may also be eligible for EIDLs if they provide essential services to the public.

How Much Can You Borrow Through the EIDL Program?

The maximum EIDL is $2 million, though most borrowers do not receive the full amount. The SBA determines your loan limit based on your actual economic injury as evidenced by financial documentation.

You can request an initial emergency EIDL advance of up to $10,000 which does not have to be repaid, even if your loan application is later denied.

The interest rate on EIDLs is very low at 2.75% fixed for small businesses and 2.375% for non-profits, with terms up to 30 years. This makes the monthly payments quite affordable. There are no prepayment penalties if you pay the loan off early.

Your loan amount is based on your actual economic injury and financial needs, minus whatever business interruption insurance and other recoveries you have received. The SBA wants to see that you have explored all options before providing federal disaster relief funds.

How Do You Apply for an Economic Injury Disaster Loan?

The SBA has made applying for COVID-19 EIDLs a streamlined, online-only process:

1. Gather your financial records – 2019 tax returns, 2020 profit and loss statement, a current balance sheet, personal financial statement, and other documents verifying your losses.
2. Create an account on the SBA disaster loan website [sba.gov/disaster].
3. Complete the online EIDL application including details about your business, the amount requested, and electronic banking info for deposit of the emergency advance.
4. Upload your financial documentation to support your economic injury claim.
5. Review and electronically sign the completed application.
6. Wait for a loan decision – usually 2-3 weeks. If approved, you will need to sign loan documents.
7. Funds are disbursed directly by the SBA into your bank account within days of approval.

The streamlined COVID-19 EIDL process does not require upfront collateral, credit score minimums, or an obligation to take the full loan amount offered. You only need to accept the actual funds you require and can decline the rest.

The SBA has tried to reduce typical disaster loan red tape, but you still must thoroughly document your losses and financial position. Having an accountant or lawyer assist with the application is highly recommended.

What Can EIDL Funds Be Used For?

EIDL proceeds can be used very flexibly to support your business including:

• Paying fixed debts like rent, utilities, insurance
• Meeting payroll and employee expenses
• Paying accounts payable and vendor bills
• Purchasing inventory and supplies
• Covering increased production costs
• Repairing damaged property or inventory
• Paying obligations that cannot be met due to losses
• Refinancing high-interest debt accrued trying to survive

The key is that all expenses must be ordinary operating costs that could have been paid had the disaster not occurred. EIDL funds cannot be used to expand or upgrade facilities or capabilities.

You will need to keep clear records on how you spent the money and be prepared for the SBA to audit your usage if requested. Misuse of funds can result in criminal charges.

What Are the Payment Terms on EIDL Loans?

A major benefit of the EIDL program is the long repayment term and deferment options, providing critical payment relief:

• 1 year deferment – No loan payments are due for the first 12 months. Interest still accrues during this time.
• 30 year term – After the deferment year, your loan is amortized over 30 years to minimize payments.
• Monthly payments – Low monthly installments are due starting after your deferment period. Payments are made directly to the SBA disaster loan servicing department.
• Early payoff – There are no prepayment penalties if you pay your EIDL off early.

This payment flexibility makes EIDL funds accessible when they are needed most, while the long term creates affordable payments stretched over decades. You can request up to 3 years of deferment if required, though interest will continue accruing.

The SBA does take a secured interest in your business assets to protect their investment. You may need to pledge collateral like real estate, equipment, or inventory depending on your situation.

Are There Any Tax Consequences With EIDL Loans?

One downside of the EIDL program is that the loan proceeds are considered taxable income by the IRS. Unless Congress acts to provide an exception, you will need to claim the funds as income on your business taxes. This could result in a substantial tax liability you need to prepare for.

However, the emergency EIDL Grant Advance of up to $10,000 does NOT count as taxable income. So make sure to request the maximum amount during the application process.

For 2020, the tax impact of EIDL loans was eliminated by the CARES Act. But for 2021 and beyond, it is uncertain if this tax relief will continue. Consult a tax professional to understand your potential liability.

The Bottom Line

The SBA Economic Injury Disaster Loan program can provide critical working capital to small businesses negatively impacted by COVID-19. These low interest federal loans have very flexible usage terms over an extended 30 year repayment period. Just be sure to have your financial records in order to prove economic injury and prepare for the tax consequences. With proper planning, an EIDL can float your business through tough times until conditions improve.