Professional Advice

The SBA’s ‘Economic Injury Disaster Loan’

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Newsletter from

Steve Richardson & Company

Certified Public Accountants

April 1, 2020

 

The SBA’s ‘Economic Injury Disaster Loan’

To Our Clients and Friends:

This newsletter will focus on the role of the Small Business Administration (SBA) in the economic recovery.

I’m qualified and licensed to read tax law and make conclusions. SBA’s ‘Economic Injury Disaster Loan’ is not tax law. I may not be as ill-informed as a layman, but reading and studying these laws is a daunting task.

The Good News

  • The SBA’s ‘Economic Injury Disaster Loan’ and the ‘Paycheck Protection Program Loans’ are easy to get.
  • These loans are for both commercial businesses and nonprofits, including churches.
  • Some loans can be made without personal guarantees
  • Loan payments can be deferred for six-months
  • The PPP Loan (discussed below) may be forgivable in part or in whole.
  • No prepayment penalties (which could be important in loan forgiveness planning).

The news that concerns me

  • The program is so new that the SBA’s own website has incorrect information.
  • The rules are evolving.
  • These loans ‘may be forgivable’ but how they are to be forgiven is, according to the law, to be determined later by the SBA, so we have a ‘trust the government’ scenario. Somehow that makes me nervous.
  • The personal guarantee v. the no personal guarantee is a snapshot of how these ‘Economic Injury Disaster Loans’ will work.
    • Each loan will be a unique negotiation
    • The rules for one loan will likely be very different from the terms of a nearly identical loan depending upon vague and ill-defined criteria.
    • In government language, “vague and ill-defined criteria” are often referred to as Rules and Regulations.
    • The “Rules and Regulations” have yet to be written; that worries me a lot!

Section I: The Emergency EIDL Grant
The Economic Injury Disaster Loan program, also known as the EIDL program has two parts.

  • The primary part is the loan itself, which I will cover in Section II.
  • There is also an ‘expedited’ EIDL Grant.

The EIDL Grant
All who apply for an EIDL loan will be eligible for up to a $10,000 emergency grant to be issued within 3 days of the application being received.

The EIDL Grant Application
This application is easy!

Go to: https://COVID19relief.sba.gov/#/

This is the online application; as I said above, it is easy.

On the last page of this 4-page application, list me as a person to whom the SBA can talk to. List my fee for this advice as zero. That way I can talk to the SBA about your EIDL Grant, and, I assume, your EIDL Loan.

Forgivable
Up to $10,000 of this grant is forgivable.

In order to be forgiven, the EIDL Grant must be used appropriately for:

  • Paid sick leave
  • Maintaining payroll
  • Meeting increased costs of materials due to an interrupted supply chain
  • Business rents or mortgage payments
  • Other obligations that cannot be paid due to lost revenues

Section II: The Economic Injury Disaster Loan (EIDL)
The $10,000 Grant discussed in Section I is part of this program, but the application and substance of the EIDL is very different.

Not forgivable
The EIDL Loan is not forgivable!

EIDL Loan Program
The purpose of the EIDL Loan is:

  • To provide small businesses with working capital loans of up to $2-million.
  • To offer low interest rates:
    • 3.75% interest rates on commercial loans
    • 2.75% interest rates on Churches and other nonprofits
  • This loan is 100% based on credit score
  • Smaller loans of less than $200,000 can be approved without personal guarantees
  • There are no early payment penalties
  • There is a 30-year amortization period.

The EIDL Loan terms are generous, but the loan must be repaid. The only forgiveness related to this loan is to go out-of-business with no personal guarantees.

Section III: The PPP Loan or ‘Paycheck Protection Program Loan’.
The purpose of the loan is to encourage businesses to retain employees through the COVID-19 crisis. This loan may be partially forgivable.

Who Qualifies
The rules on who qualifies for this loan are generous.

  • A business with less than 500 employees
  • Independently owned franchises with less than 500 employees
  • “Accommodation and Food Services,” if each location has less than 500 employees
  • Sole proprietors, independent contractors, self-employed individuals, farmers, etc.
  • §501(c)(3) nonprofits. This includes churches!
  • AND You must have been in business since 02-15-2020 and paid taxes on your employees or independent contractors.

How much can you borrow?

  • 2.5 times average monthly payroll for the previous year, up to $10 million.
  • Payroll costs are capped at $100,000 for each employee
  • For example, if your average monthly payroll for 2019 was $30,000, then you can borrow up to $75,000 ($30,000 x 2.5).

What are the terms of the loan?

  • Payments are deferred for at least 6 months and possibly up to a year.
  • The interest rate will not exceed 4%
  • The loan will be for 10 years
  • The SBA will guarantee the loan; no collateral is required.
  • There is no prepayment penalty

How can you use the loan?

  • You can use the funds to:
    • Retain workers: 75% of loan proceeds must be used for payroll!
    • Maintain payroll
    • Business Mortgage payments
    • Business Rent and Lease payments
    • Utility payments
  • You must certify that the PPP Loan will be used to support ongoing operations of the business due to the current economic conditions.
  • The loan can only be used for expenses incurred between 02-15-2020 and 06-30-2020. Very Short Term!!
Steve’s Note: You should consider putting the PPP Loan proceeds in an escrow account and withdraw funds strictly according to the outline shown above. The unexpended (and therefore unforgivable) proceeds of the loan can then be refunded to the SBA.

Tell me more about PPP Loan forgiveness!

  • Only expenses incurred between 02-15-2020 and 06-30-2020 are subject to forgiveness.
  • Borrowers, upon receiving PPP Loan proceeds, must immediately hire back furloughed employees and expend funds on payroll costs.
  • Payroll costs
  • Payments on interest of any business mortgage obligations
  • Business rents
  • Utilities
  • ***** Document, Document, Document *****
    • Keep detailed verification of exactly when and how these funds were used. This is a case where poor bookkeeping can and will hurt you – bad!
    • Be Careful!!

Steve’s Note: having some or all of the ‘PPP Loan’ forgiven will depend in large part upon our ability to prove that these funds were used for the purposes as described above.

Where can you apply for the PPP Loan?

  • The bank you normally use is very likely already approved by the SBA.
  • Additional lenders will be approved.

There are strings attached
It’s the government. Of course there are strings attached!

Sincerely,

Steve Richardson, CPA

 

 

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