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Monday, November 8, 2021

The Top Things Business Owners Need to Know About Changes to the SBA EIDL Program

By John Wood, CPA/CVA and Principal

While 2021 has seen a slow but steady return to “normal” in some respects, many business owners nationwide are still feeling the impact of COVID-19 and unfortunately are likely to for quite some time. The federal government enacted three programs designed to help business owners through the pandemic, two of which – the Paycheck Protection Program (PPP) and Employee Retention Credit (ERC) – our team has shared more about in the previous Ft. Thomas Matters articles.

Recently, the government made significant changes to a third federal relief program designed to help small businesses: Economic Interest Disaster Loans (EIDL). 

EIDLs are structured differently than PPP or ERC. Unlike those programs, it is a loan that must be paid back in full as there are no forgiveness qualifiers. However, there are several aspects of the program that may make it worth considering for businesses struggling with cashflow. 

Our Rudler team has compiled the following Q&A to help businesses determine if EIDLs are right for them.

Who qualifies for the EIDL program?

Small business owners of for-profit and nonprofit organizations with 500 employees or less that have been in business as of Jan. 21, 2020.

How much can an organization borrow through an EIDL?

Originally, EIDL loans were to be made available to qualifying applicants in amounts up to $500,000. However, the SBA announced that it would start approving loans in amounts over $500,000 (up to $2 million) on Friday, Oct. 8. Also, EIDLs can now be used to include both payment and pre-payment of businesses federal and non-federal debt incurred at any time (past or future). The funds cannot, however, be used for things such as expanding a business, paying for new equipment, etc.

What is the deadline to apply?

Businesses interested have until Friday, Dec. 31 to apply for an EIDL.

How can EIDLs be used?

Proceeds from an EIDL are primarily meant to be used for working capital purposes. However, as mentioned previously, EIDL proceeds can now also be used to refinance other business debt. Any business with cash flow issues or high interest-bearing debt should consider applying for an EIDL.

What do interest rates and repayment terms look like?

The loans, paid directly from the U.S. Small Business Administration (SBA), are 30-year, fixed rate loans of 3.75% for for-profit and 2.75% nonprofit organizations. Payments are deferred for the first 2 years – although interest will still accrue – with no penalty for prepayment.

Are there fees to apply for EIDLs?

There are no fees for loans of $25,000 or less and a one-time $100 fee for filing a lien on the borrower’s business assets (plus costs to file on real estate when applicable). In addition to the $100 lien filing fee, those applying for more than $500,000 will be responsible for recording the real estate lien and any associated fees. All EIDL loans – including companies and organizations that had already filed for up to $500,000 that may now seek up to the $2 million threshold – can be applied for online at the SBA’s COVID-19 Disaster Loan Assistance page . The application for the EIDL is relatively short and straightforward.

Why should organizations consider applying for an EIDL?

Small businesses and nonprofits of 500 or less employees might want to consider applying for an EIDL for several reasons:

  • The 3.75% and 2.75% fixed rates are considerably low for a long-term loan, especially one where you may be able to borrow up to $2 million with the first two years of payments deferred.
  • Businesses also have the ability to use the funds to refinance previous debts at lower, fixed rates and a longer period to pay the debts off. This has been very helpful to many of our clients, especially given the events of the last 19 months and constantly changing nature of the workplace.
  • Those applying for an EIDL of $500,000 or less will be happy to find there is very little underwriting involved other than the SBA verifying your identity and financial information. Your business simply needs to have been in operation on or before Jan. 31, 2020, to be eligible for a loan and have a minimum credit score of 570.

Are there additional requirements for EIDLs above $500,000?

If you are applying for an EIDL above the $500,000 mark – officially known as a COVID EIDL Increase Application by the SBA – there are additional qualifications that must be met. First, you must meet a minimum credit score of 625 and more underwriting stipulations ( SBA form 2202 and 413 , respectively, regarding your Schedule of Liabilities and Personal Financial Statement) to prove your ability to pay back the loan.

Also, as mentioned above, a lien will be placed against your physical real estate to ensure the loan can be paid back in full (which also brings more fees with the filing of the lien as well). If you have already applied for an EIDL, be sure that you complete your request online by logging into your account in the application portal.

Advice for Business Owners

Whenever faced with a decision involving several hundred thousand or, in the case of an EIDL, up to $2 million, it is easy to understand how the application process can become overwhelming. Likewise, truly understanding how a loan of this nature may or may not be right for meeting your needs is crucial to the success and future of one’s organization. Consulting with a financial expert that is well-versed in these types of programs is always a good idea.

With no other program comparable to this in existence applying for an EIDL may be the perfect way to align your business in the right direction for 2022 and beyond.

Click here to contact Rudler, PSC for all your accounting needs.

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