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CARES Act Expands Availability of Economic Disaster Loans and Provides for Emergency Cash Advances | Cohen Seglias Pallas Greenhall & Furman PC

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The Economic Disaster Loan Program (EIDL) is an existing loan facility operated by the Small Business Administration (SBA) of the United States under section 7 (b) of the Small Business Administration Act of 1953 (SBA Act). The objective of the EIDL program is to provide loans at low interest rates to small businesses affected by disasters. The availability of the EIDL program was historically based on the declaration of a disaster in a state or region approved by the federal government.

Under the Coronavirus Preparedness and Response Supplementary Appropriations Act, the coronavirus pandemic has been declared a disaster, allowing affected businesses to apply for an EIDL. The recently enacted Law on Aid, Relief and Economic Security (CARES Act) amended the EIDL program, increasing the amount of funds allocated to the SBA, relaxing the eligibility requirements for an EIDL and providing for an advance of 10 $ 000 from the SBA within three days of an application completed by an eligible business. This cash advance will not need to be repaid, even if the eligible business is denied an EIDL.

Small businesses qualified to apply for an EIDL

A business is qualified to apply for an EIDL if it falls into one of the following categories:

  1. A business with 500 or fewer employees
  2. Individual who operates as a sole proprietorship or as an independent entrepreneur
  3. Cooperative enterprise with 500 employees or less
  4. Employee share ownership plan, commonly known as ESOP, with 500 employees or less
  5. A small tribal business, as defined in the SBA, with 500 or fewer employees
  6. A business, including a business with more than 500 employees, which is considered a small business under the SBA size standards
  7. A private, non-profit organization that is exempt from tax under 501 (c), (d) or (e) of the Internal Revenue Code

In addition, the business must have existed on January 31, 2020.

Emergency cash advance

The CARES Act establishes that an eligible business can request an emergency advance not exceeding $ 10,000 when applying for an EIDL. The deposit is paid by the ASB within three days of receiving the request from EIDL. The CARES Act requires that the cash advance be used for one of the following purposes: granting sick leave to employees, maintaining the payroll, dealing with increased costs for obtaining materials, making rent or rental payments. ‘mortgage, or pay off obligations that cannot be fulfilled due to lost income. The applicant is not required to repay the advance, even if the company is subsequently refused an EIDL. However, if the company receives a Paycheque Protection Loan under the CARES Act, the cash advance will be subtracted from the amount of the paycheck protection loan eligible for loan cancellation.

EIDL payment terms

The amount of an EIDL can go up to $ 2,000,000, the amount being based on the economic damage suffered by the business as a result of the disaster. The interest rate is 3.75% for a small business and 2.75% for a non-profit organization. The maximum duration of an EIDL is 30 years. The SBA will determine the repayment period and monthly payments based on the financial situation of the applicant. An EIDL will not be forgiven by the SBA. Loans with a principal balance exceeding $ 25,000 must be secured by some form of collateral. The CARES Act, however, waives the requirements for a personal guarantee when the EIDL is less than $ 200,000.

Purpose of an EIDL

The proceeds of an EIDL must be used to meet working capital requirements. The EIDL can be used to pay fixed debts, salaries, accounts payable, and other operating expenses that cannot be paid due to the impact of the disaster. EIDL proceeds may not be used for the following purposes: to develop business operations, to pay dividends and / or cash bonuses, or to make payments to officers and owners, unless such payments are directly related to the provision of services for the company.

Apply for EIDL

The EIDL program is administered directly by the SBA, and there is no fee to apply. The SBA has put in place a simplified procedure allowing a company to apply for an EIDL and to request a cash advance through the ASB website.

Conclusion

The loan programs that the federal government is offering to small businesses in response to the COVID-19 pandemic are evolving rapidly as the SBA and participating lenders develop procedures to apply for these loans and verify eligibility. It is anticipated that there will be a very strong demand from businesses wishing to take advantage of these programs. It is recommended that you contact the financial institution you are working with as soon as possible to determine if they participate in the CARES Act loan programs and what procedures the financial institution has adopted for loan applicants.