No matter how much planning we do, disasters will occur. Both the COVID-19 pandemic and a recent uptick in natural disasters have affected many different components of our lives—including the viability of some small businesses. Across the country, there are countless small businesses that were once thriving and are now in need of financial assistance.
When a disaster occurs, small business owners might begin looking to the private sector for help. However, in many situations, if the business does not have enough leverage, it might not be able to secure a loan, or at least secure a loan with a desirable interest rate.
Luckily, there are some alternative options available for small business owners. For example, an Economic Injury Disaster Loan is a type of loan supported by the Small Business Administration (SBA) for “economic injury” that occurs during a disaster.
Understanding Economic Injury Disaster Loans
According to the Small Business Administration, “Small businesses, small agricultural cooperatives, and most private nonprofit organizations located in a declared disaster area and which have suffered a substantial economic injury may be eligible for an SBA Economic Injury Disaster Loan (EIDL).”
The SBA is a federal agency that “provides counseling, capital, and contracting expertise” and is “the only cabinet-level federal agency fully dedicated to small business.” An EIDL is one of many loans offered by the administration and can be used for many different business-related purposes.
The SBA offers EIDLs for COVID-related economic setbacks, as well as other types of economic injuries. Currently, the limit for an EIDL is $2 million, though these loans can also be combined with other financing from the SBA, such as a business physical disaster loan that can be used to cover various types of property damage.
In addition to being relatively easy to qualify for, EIDLs also have excellent terms. For businesses, the standard rate for a 30 year loan is 3.75 percent and you will not be required to make payments for 24 months—for non-profits, the rates are even better, at 2.75 percent.
Who is Eligible for an Economic Injury Disaster Loan?
Even though most small businesses have been affected by the COVID-19 to some extent, not all businesses will be able to qualify for an EIDL. According to the SBA, “EIDL assistance is available only to small businesses when SBA determines they are unable to obtain credit elsewhere.”
This means that small businesses should usually start by exploring their other options before applying for an EIDL. Additionally, the business must be able to demonstrate that, due to the economic injury, it is no longer able to “meet its ordinary obligations and pay its ordinary and necessary operating expenses”—these loans are not designed for businesses that simply want more capital (for example, wanting to expand or open a second location) but for businesses who has been distinctively and verifiably affected by a particular disaster.
How Can I Apply for an Economic Injury Disaster Loan?
Applying for an EIDL is relatively easy. Small businesses and other potential qualifiers can apply directly online (working with a CPA might help). The businesses will also need to complete IRS Form 4506-T, which gives the SBA the authority to access your tax returns and other information throughout the loan application process.
In some cases, such as loans exceeding $25,000, the applicant will be required to provide collateral (meaning this is a secured loan), such as real estate or other valuable assets. Businesses who have been affected by the COVID-19 pandemic, in particular, will have until the end of 2021 to apply for a special “COVID-19 Economic Injury Disaster Loan”, which is generally a more forgiving loan than its standard counterpart.
Should My Small Business Apply for an Economic Injury Disaster Loan?
Whether your business should apply for an EIDL will depend on several factors. First, your business must fit into one of three distinct categories—small businesses, small agricultural cooperatives, and “most” private nonprofit organizations.
Additionally, you must be able to demonstrate that your organization can actually qualify for the loan. This means proving that your “economic injury” is a result of a disaster, including COVID-19 and other disasters. This loan is designed for those that have not been able to secure financing elsewhere. The loan is not designed for business owners who simply want more capital.
However, if your business does meet the criteria mentioned above, then applying for an EIDL might be a good idea. Be sure to work closely with your accounting team to learn more about this unique financing opportunity and develop a long-term financial strategy. WKB Accounting LLC is here to help your business learn more about applying for an EIDL and address your long-term accounting needs.