What to know about SBA EIDL program funds
Over the past few months, attention has been focused on understanding and obtaining the Small Business Administration (SBA) Paycheck Protection Program (PPP) loan, due to its forgiveness potential if used appropriately.
However, another CARES Act stimulus program business owners have access to is the Economic Injury Disaster Loans (EIDL). This program has traditionally been utilized by small businesses impacted by natural disasters such as hurricanes, tornadoes or widespread fires. The recent CARES Act expanded the definition of a “disaster” to include national health emergencies and loosened some of the normal EIDL qualification requirements allowing many small businesses to access the program to obtain emergency liquidity during the pandemic.
The EIDL program has two major facets; EIDL grants (also referred to as an advance) and an EIDL loan.
EIDL GRANTS
The CARES Act added to the EIDL program a one-time emergency grant of $1,000 per employee, up to a maximum of $10,000. It is important to note that if you also received the PPP loan, the EIDL grant will reduce the forgivable portion of the PPP loan dollar for dollar.
At this point, there are no clear stipulations as to the use of the EIDL grant funds. CWA believes these funds can be used for any of the EIDL allowable uses referenced below.
EIDL LOANS
The EIDL loan program authorizes each borrower to qualify for a loan up to $2,000,000, as determined by the SBA. Repayment terms on the loans are over a 30-year term at 3.75%. This makes it an attractive option for small businesses to have access to additional liquidity and reduce the cash flow burden as they begin to rebuild their business. In addition, the loan contains a 12-month payment deferral beginning on the loan date. There is no prepayment penalty on an EIDL loan should you have the ability to repay the loan sooner than the full 30-year term.
Uses of EIDL Proceeds
EIDL proceeds can be used for general operating expenses for your business. This could include purchases of supplies, including personal protective equipment (PPE), lab expenses, advertising, regular loan principal payments and other fixed expenses.
EIDL funds cannot be used for physical repairs, expansion of physical facilities, acquisition of fixed assets, bonuses, owner distributions (non-performance related) or refinancing existing debt.
Additional limitations exist if you have also received a PPP loan, as the SBA guidelines state that PPP and EIDL disbursements cannot be used for the same purpose. Therefore, a borrower with a PPP loan cannot use EIDL proceeds for PPP qualified expenses which may include payroll costs (including employer retirement contributions and employer group health premiums), rent, utilities or loan interest.
Other Considerations
It is recommend that any EIDL loan proceeds be segregated in a separate account, apart from operating accounts and PPP accounts. Similar to the PPP, documentation and support for the use of EIDL funds is essential. Ensure you are keeping clean records and receipts in the event you need to provide this documentation to the SBA.
The EIDL program is an excellent way for business owners to obtain liquidity and have some cash flow flexibility during an uncertain time. It is recommend that you utilize the PPP loan first for qualified expenses and then the EIDL loan to supplement and pay for general operating expenses. As your practice continues to ramp up and increase collections over time, the two loans can be used to cover overhead costs, which would allow the ability to build up additional cash flow in the practice and potentially pay down existing debt.
As a reminder, the recommendations presented in this blog are based on what we know now. SBA guidance on these topics is limited and additional clarifying guidance is expected to be released soon.
We are continually staying on top of the release of information and will provide updates if necessary. Bookmark the COVID-19 Resources Page for the latest. Work with your CWA advisor if you have additional questions on the applicability of the EIDL program or the use of EIDL proceeds as it relates to your financial situation.
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