Economic Disaster Lending (EIDL): The Devil is in the Details | Parker Poe Adams & Bernstein LLP

The EIDL program provides small businesses and non-profit entities with loans at low interest rates. Although Congress has provided for a maximum loan amount of $ 2 million, the SBA has announced that it has imposed a maximum loan amount of $ 150,000. The terms of EIDLs are typically 30 years with a rate of 3.75% for most applicants and a rate of 2.75% for nonprofit entities. During the application process, an applicant can apply for an emergency EIDL grant of up to $ 10,000 ($ 1,000 per employee, up to $ 10,000). Although the EIDL itself is not forgivable, no emergency EIDL grants need to be repaid.

Due to the high demand for the EIDL program, the SBA is no longer accepting EIDL applications related to COVID-19, with the exception of applications from agricultural businesses. Applicants who have already applied will continue to be treated on a first come, first served basis.

Now that the SBA has started distributing loan documents to EIDL loan recipients, here are some things the borrower should keep in mind:

SBA phishing e-mail correspondence

In recent weeks, the SBA has started sending emails to EIDL applicants confirming the dollar amount of the loans and providing application numbers. Due to the impersonal nature of emails, their automated appearance, and the delay between the time borrowers submit their EIDL applications (some as early as March) and receiving these emails (in June), many borrowers have questioned whether the emails were genuine or a phishing attempt.

The SBA warns against phishing attempts on its website and cautions applicants to pay close attention to their application number on all SBA correspondence.

EIDL Interaction with the Paycheque Protection Program

While no explicit provision in the CARES Act or subsequent amendments prohibits a borrower from simultaneously receiving a PPP loan and an EIDL loan, regulations issued by the SBA provide that the use of EIDL loan funds for costs salary could affect eligibility for a PPP loan. In light of SBA guidelines, we recommend that any borrower who receives both types of loans create separate accounts to separate the proceeds from each loan and avoid commingling of funds, keep detailed records of all expenditure of loan funds and use no EIDL covers reimbursable salary costs under the PPP loan program. For more details on the PPP program and forgiveness, see our recent customer alerts.

Small business requirement

Among other requirements to receive an EIDL, an applicant must qualify as a small business. In general, this means that the company must either (a) meet the existing SBA size standard specific to its particular industry (definition of small business prior to the CARES Act), or (b) employ 500 employees or less (broadening the definition of the CARES small business law). Some of the industry-specific SBA size standards are based on employee size (typically ranging from 100 to 1,500), some are based on average annual earnings, and some are based on average assets. If a company does not pass the CARES Act staffing test of 500 or less, it may still be able to qualify if it meets its SBA size standard, even if that size standard is headcount. of employees.

Loan document conditions

The EIDL documents released by the SBA should be carefully reviewed as there may be obligations in the documents that the borrower did not expect or which could affect the borrower’s ability to comply with the EIDL. or demand a refund sooner than expected. The EIDL documents typically provided for a 30-year repayment term, a fixed annual interest rate of 3.75% (2.75% for nonprofit entities) and no personal guarantees.

Pledge of all assets

While EIDLs of less than $ 200,000 require no personal collateral, loans over $ 25,000 are nonetheless secured by an aggregate pledge of all of the borrower’s assets. For those with a line of credit or other secured loan, EIDL could trigger a technical default under the borrower’s existing loan agreements. It is important that borrowers communicate with their existing lenders regarding their EIDL application.

SBA authorization required to sell many assets (vehicles, furniture, equipment, computers)

EIDLs require SBA approval for the sale or disposal of any asset other than inventory in the ordinary course of business. Since this is an “all assets” pledge, this means that, for the next thirty years, borrowers are technically required to obtain SBA approval before removing old computers, furniture, tools, equipment or vehicles. Thirty years is a long time and it remains to be seen how the SBA plans to enforce these loan provisions.

Risk insurance required by the SBA on all assets

Borrowers are required to purchase risk insurance covering all assets up to 80% of the value of the assets and to provide proof of this insurance to the SBA. Borrowers must maintain this assurance for the duration of the EIDL.

Future loans must repay EIDL

If a borrower later receives a loan from another source, they must use those loan funds to withdraw the EIDL. Although the SBA has not provided guidance on which loans are covered by this repayment obligation, any form of financing outside the ordinary course of business is likely covered. The repayment obligation may also cover intercompany loans of a related party.

These conditions in loan documents may surprise many borrowers, depending on current or planned activities. We urge all borrowers to carefully review the terms of their EIDLs as well as any existing loans. We also recommend that you seek advice and counsel from a lawyer regarding your loans.

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