Eye-Opening Details about SBA Economic Injury Disaster Loan

SBA (Small Business Administration) disaster loans offer federal assistance towards the rebuilding and repairing private sector and non-farm disaster losses.

SBA economic injury disaster loans provide up to 2 million dollars for things such as payroll, accounts payable, fixed debts plus other expenses that can’t be met as a result of the disaster’s effect. The loan will depend on one’s actual economic injury as well as your business needs. Later in this article, you’ll learn about SBA economic injury disaster loan disbursement terms and conditions. In the meantime, let’s look at the meaning of economic injury.

What’s Economic Injury?

Economic injury is when a business can no longer meet ordinary business operation expenses. Such a business needs to be repaired and rebuilt to survive. That’s where SBA loans come in. However, just like other loans, terms and conditions apply. For a small business without credit elsewhere, the interest rate is 3.75%. But if your company has credit elsewhere, you’re not eligible for such loans.

SBA loan terms do not exceed 30 years, and payment duration depends on one’s ability to repay. SBA must evaluate your small business to confirm that you indeed can’t obtain credit elsewhere for a loan request above $350,000.

To apply for an SBA EIDL, you are supposed to apply through the government. So, you shouldn’t apply it via an SBA lender. Note that SBA economic injury disaster loan disbursement may take about five months.

What paperwork do you need to prepare?

Below are the things you’ll need to prepare;

  •         SBA Form 5
  •         Three years of personal tax returns and business
  •         Personal financial statement
  •         Business debt schedule
  •         Income statement and balance sheet for the previous year

In short, you must reveal the previous year’s month-to-month financials. Also, to show discrepancies, be sure to project the coming months.

Note that if your business had low-profit margins in the previous year, your chances of getting the loan are low.

Who is Eligible for SBA EIDL?

For your business to qualify for an SBA economic injury disaster loan, it must have at least 500 employees or fewer. Such businesses include;

  •         Cooperative
  •         ESOP
  •         Small agriculture cooperative
  •         Sole proprietorships- with workers or without
  •         Tribal small businesses
  •         Independent contractors
  •         Employee-owned businesses and cooperatives

Terms

  •         You can get a loan amount of up to $2,000,000
  •         30 years repayment period, which is based on case-by-case criteria
  •         2.75% interest rate for non-profit and 3.75% for small businesses.
  •         As the applicant, you must run that business for at least one year before the disaster.
  •         Must not have credit available elsewhere

Criteria used for loan approval

  •         Good personal credit history
  •         Ability to repay the loan
  •         The purpose for loan application; bills, accounts payable, payroll, and pay fixed debts.

Note that the CARES Act has given SBA a mandate to accept applications and give loans based on the applicant’s credit score. However, SBA can also use a suitable alternative to evaluate the applicant’s ability to repay the loan. SBA’s EIDL funds are from the U.S. treasury directly.

To qualify for the loan, you must prove that the economic injury is extensive and resulting from a declared disaster. Substantial economic injury decreases income making it impossible for a business to pay ordinary bills and fulfill its obligations.

How Soon Should You Expect to Get the Funds?

The CARES Act has established an Emergency Grant that allows an eligible applicant who has requested an EIDL loan following a declared disaster such as COVID-19  to get an advance of the loan. But it should be nothing more than 10,000 dollars- the SBA must disburse this fund in 3 days.

Before releasing the advance payment, SBA must get certification under penalty of perjury from the applicant to prove their eligibility. With the advance payment, sick employees can get sick leave. It can also help maintain payroll, make mortgage payments, pay rent, and pay the cost incurred in buying business materials.

 Purposes that Qualify for SBA EIDL

As earlier said, EIDL can clear fixed debts, accounts payable, payroll, and meeting other business expenses that can no longer be met because of the disaster’s impact. The loan in question must be used for specific purposes, or it could be denied. There is a hefty penalty linked to the misuse of disaster funds. You’ll be required to repay the loan immediately at a very high-interest rate- one and a half times the actual loan amount.

EIDLs do not permit business owners to use the loan to enlarge their business operations, pay bonuses or cash dividends or distribute payments to partners, owners, officers, owners, stockholders who are not directly attached to your business operations.

Also, SBA cannot refinance long-term debts and does not offer funds that a business needed before the disaster.

How SBA Determines your Loan Amount

An applicant’s loan amount will depend on the economic injury’s degree, plus their business financial needs. Therefore, you can apply for an EIDL loan according to actual economic injury and your business operation needs. So, you can’t apply for a loan that exceeds the amount your company could have spent in case the disaster didn’t happen.

When determining the amount you qualify for, the SBA looks at the following aspects;

  •         Your overall debt obligations
  •         Looks at business expenses that will mature within the disaster period, plus the funds your company needs to maintain its operations during the disaster.
  •         Bills you could have cleared and the working capital status you could have retained if the disaster had not occurred. Note that the COVID-19 disaster loan that exceeds $25,000must be secured by collateral.

How to prove that Substantial Economic Injury affected your Business

If your business can’t sustain its normal operations following a disaster, then it has indeed suffered an economic injury. But you can’t prove substantial economic injury with lack of profit or incurring losses only.

You can compare weekly, monthly, and quarterly KPIs (Key Performance Indicators) before the disaster and during the disaster period, along with a lack of profit and losses. KPIs include the following;

  •         Declining sales; decreasing sales during a pandemic is a sign of economic injury.
  •         Profit margins; reduced profits and losses during a disaster
  •         Cash burn rate; this is an indicator of additional cash your company requires every month to maintain its operations.

Others include debt service coverage, inventory turnover, aging, and turnover of accounts receivable, among others.