Since the start of the pandemic, many small businesses have struggled, and yours may be among them.
The good news is that the US government gives businesses and individuals recovery loans through the Small Business Administration.
An example of such a loan is the Economic Injury Disaster Loan (EIDL). In this article, we will explore and identify everything you need to know before applying for the SBA EIDL loans.
What are Economic Injury Disaster (EIDL) Loans ?
EIDL loans are given to business people who suffer losses or lack business capital due to adverse impact of disasters on their businesses.
The SBA gives EIDL loans based on the amount of economic injury an individual or business has suffered.
Any insurance benefits you’ve received to pay for losses resulting from the disaster are deducted from EIDL loans.
To qualify for an economic injury disaster loan, you must have a business in a disaster area and prove you’ve suffered losses or setbacks during a disaster. A good example is the Covid -19 pandemic.
All small businesses and non-profit organizations are eligible for EIDL loans.
However, there are some exceptions including businesses involved in;
- Illegal activities
- Gambling
- Lobbying
- Adult entertainment
You may also not qualify for EIDL financing if one of the partners owning at least 20% of your business is incarcerated, on parole, probation, subject to an indictment for a crime, or has a recent history of crime.
Individuals with pending child support obligations are also ineligible for EIDL loans.
What type of financing do you get when you apply for EIDL loans?
The kind of financing you get for EIDL loans includes;
- Home disaster loans to repair any disaster-related damages to your house or replace damaged items
- Working capital loans to meet your necessary and ordinary business expenses. These should be expenses you cannot meet because of challenges resulting from a disaster.
If you have another kind of financing from the SBA, such as a PPP loan, you must follow specific regulations when using your loan funds.
For example, you cannot use EIDL funding to pay for any expenses you’ve paid using Paycheck Protection Program (PPP) funds until you repay your PPP loan.
Requirements for an SBA EIDL loan
While every US citizen is eligible to apply for EIDL loans, you will require further documentation including:
- Financial documents. The SBA may require some financial documents from you to determine whether you are eligible for EIDL loans, such as tax records and bank statements
- A good credit history. Your credit history is very important when applying for a loan from any institution. The SBA requires anyone applying for EIDL loans under $500,000 to have a credit score of 570 and 625 for loans over $ 500,000
- Proof you can pay the loan. Although the EIDL loan is there to help you recover from financial losses caused by a disaster, the SBA needs evidence that you can repay it
- Collateral. While you can get EIDL loans below $25,000 without security, anything above this amount will require some form of collateral. Some examples are real estate or a car. However, you should note that the SBA does not deny loans to people who lack enough collateral. They only require you to pledge whatever is available
- Personal guarantee. The SBA may require EIDL loan applicants to provide a personal guarantee for loans higher than $200,000.
What is the interest rate on EIDL loans?
The SBA does not charge upfront fees or prepayment penalties for EIDL loans, making it an attractive financing option for anyone struggling with disaster-related losses or challenges.
EIDL loan interest rates are determined according to an applicant’s credit availability elsewhere.
Credit availability elsewhere refers to:
- Funds you’ve saved somewhere else
- Resources that can help you pay for the loan, or
- Proof of your ability to borrow another loan from a non – governmental institution
The interest rates for EIDL loans given to people without credit available elsewhere are:
- Home loans – 1.438 %
- Business loans – 2.830%
- Non-profit organizations – 1.875%
The interest rates for EIDL loans given to people with credit available elsewhere are:
- Home loans – 2.875%
- Business loans – 5.660%
- Non – Profit organization – 1.875%
What are the loan terms for EIDL loans?
The SBA authorizes EIDL loans for a max of 30 years. However, businesses with credit available elsewhere are given a maximum of 7 years to repay their loans.
Businesses that apply for EIDL loans are limited to borrowing $ 2,000,000 to repair or replace inventory, equipment, machinery, real estate, and physical losses.
However, the SBA may waive the loan limit if a business is a significant source of employment for many workers.
The SBA determines the loan amount after analyzing the needs of a business or any losses suffered due to economic injury.
For example, there are home EIDL loans of up to $200,000 for replacing and repairing damages to homes or rental real estate.
Homeowners can also get up to $ 40,000 to repair damages to personal property or replace items damaged beyond repair, such as cars.
The SBA requires some businesses to obtain insurance for any property they repair using EIDL funds.
For example, loan applicants must get flood insurance to protect any property they use as collateral for an EIDL loan.
They must also insure any property they repair using EIDL funds located in a flood hazard area.
However, it’s important to note that the insurance amount must also meet SBA regulations. One of them is that it must be the lesser of the total of the disaster loan, the maximum insurance available, or the insurance value of the property.
Emergency grant advance for EIDL Loans
Once your EIDL loan is approved, you can get up to $ 10,000 in 3 days to meet emergency needs. This emergency money is referred to as an emergency grant advance.
It is referred to as a grant if you use it to meet operational costs such as payroll expenses, paid leave expenses, and mortgage payments.
However, you cannot apply for any other financing for the expenses you pay for using the emergency grant advance. For example, you cannot pay for family leave wages if you take tax credits for those expenses under the Families First Coronavirus Response Act.
Factors that may reduce your chances of getting an EIDL Loan
You may lose out on getting part or all of the loan amount you request for when applying for an EIDL loan.
Some of the reasons the SBA may deny you the loan amount include:
- Uninsured losses. The SBA does not give loans exceeding the verified uninsured disaster losses to your business or home
- Ineligible property. Some properties that may be ineligible include second homes, luxury cars, planes, or boats
- Non – compliance. Not complying with previous SBA loan requirements may also prevent you from accessing an EIDL loan. An example is not maintaining hazard insurance for previous SBA loans
- Pre-existing loans. If you are applying for grants or finances for your business from another assistance program, the SBA may refuse your loan application for an EIDL loan. You also cannot use an EIDL loan to pay dividends.
Additional funding on EIDL loans
After your EIDL loan is approved, you may be eligible for additional funds to finish repairs or meet any remaining expenses for your business that the original loan does not meet.
This kind of financing is called mitigation loan money. You can use it to protect your business or home from future disaster-related damages.
Mitigation loan money should not exceed 20 percent of the physical damage to your property.
However, you do have to provide cost estimates for improvements while submitting your application.
Final thoughts on SBA EIDL loans
Now you know a bit about what you need to apply for an SBA EIDL loan.
It’s good to note that you can also apply for other loans to pay for different business expenses, such as Employment Retention Credit (ERC). This is financing meant to help businesses keep employees on their payroll.
As you can see, there are quite a few financing options available if your business is struggling or you are trying to recover from damages to your property after a disaster.
Author: Bernadette Brown