What Can I Use My EIDL (Economic Injury Disaster Loan) For?

Let’s be real; 2020 was a tough year. Not only did the coronavirus pandemic separate us from our friends, family, and loved ones, but it also took a huge economic hit on millions of individuals around the world. If you owned a restaurant, retail store, or really any business for that matter, chances are you felt the Covid-19’s far reach. Luckily EIDL Loans are meant to help those financially hurt by uncontrollable disasters, such as the Covid-19 pandemic. However, for those who have never received a Government Assistance Loan before, the process of applying and understanding the limitations of the loan itself can create more stress and confusion than it does assistance. Although it may feel like we are beginning to see the light at the end of the tunnel, no one can be certain how long the economic impact of Covid-19 will last, and many businesses are still struggling to stay afloat. Because of this, it’s just as important as ever to learn about EIDL Loans and determine whether or not they can provide the help you need for your business. In this article, we are going to clarify some common misconceptions about EIDL’s and what you can’t and cannot use them for. In addition to EIDL’s, Seek Capital provides the financial advice businesses need to succeed. With a little bit of help and know-how, your business will be back and booming.

What is an EIDL?

To start off, EIDL stands for Economic Injury Disaster Loan. While many people became aware of EIDL’s towards the start of the pandemic, EIDL’s have actually been around for much longer. EIDL’s are provided by the SBA or Small Business Association and commonly pop up in headlines when natural disasters such as hurricanes occur. Due to the unprecedented, widespread nature of the Covid-19 pandemic, the CARES Act over $2 Billion worth of EIDL Loans. Out of this 2 Billion, each small business is allowed up to $500,000 of relief, though this number has fluctuated throughout the pandemic. It’s also important to note that businesses can’t apply for a specific amount. Instead, the SBA will determine how much you are eligible for based on the information you provide in your application.

EIDL: A Topic Of Interest

EIDL’s are also unique because of their interest rates. EIDL’s have fixed interest rates of 4%. This rate is even lower for nonprofits, sitting at 2.5%. For reference, interest rates for average personal loans sit closer to 10% EIDL’s also offer a longer repayment period of up to thirty years, taking away the added stress of having to pay back the amount borrowed quickly. Furthermore, there are no prepayment penalties, which are typically set in place to prevent borrowers from paying off their loans early, which would prevent lenders from collecting as much interest. (how rude)

Do I Qualify for an EIDL?

While taking out an EIDL may seem like an extremely attractive and even necessary step for your business, you’ll first have to make sure you qualify. Let’s cover some of the basic criteria you’ll have to meet in order to receive an EIDL, as well as some factors that may prohibit you. You can qualify if your business:

• It was in operation before January 31, 2020
• Has 500 employees or less or be considered a small business by the SBA
• Was affected by the Covid-10 pandemic

It’s important to note that sole proprietors, private contractors, and self-employed persons also qualify for this loan. Furthermore, there is no set credit requirement to qualify for an EIDL, but there are factors to consider. For instance, being delinquent on child support obligations or having judgments against you for federal debts hinder your eligibility. Even if you have less than satisfactory credit or isolated instances of missed payments, you can still qualify as long as you explain the lapse and have other accounts of agreed payment records. Additionally, if you don’t qualify for an EIDL, there are still plenty of business loans outside of the SBA that you can apply for.

How Much Can I Get?

While the criteria for qualifying for an EIDL is pretty broad, the amount received will vary greatly from business to business. The SBA determines loan amounts by utilizing several algorithms, which include your company's actual economic injury and your company's financial needs. The maximum loan amount, however, is $500,000. Additionally, loans over 25,000 will require collateral.

What You Can Use An EIDL For?

Even if you qualify, you may be unsure of what you can and cannot use the EIDL for. This is extremely important, as it will help you determine whether or not receiving an EIDL is right for your business. Next, we’ll go over what you can and can use an EIDL for. According to the SBA, “Economic injury loan proceeds can only be used for working capital necessary to carry the concern until the resumption of normal operations and for expenditures necessary to alleviate the specific economic injury”. To further break this down, the SBA states that the loans can be used for fixed debts, payroll and expenses, accounts payable, and other bills that can’t be paid because of the disaster’s impact. Unfortunately, there is no definitive list provided by the SBA explicitly stating all the things that EIDL’s can be used for, so it’s best to err on the side of caution. However, the loans can be used to purchase more inventory for your business and cover rent and utilities. EIDL funds can also be used to purchase what the SBA considers “extraordinary items”, which are needs outside of normal operations and directly caused by the disaster. These include:

• Inventory replacement
• Additional advertising costs
• Temporary rent or storage fees
• Accelerated debt due to the disaster

EIDL funds can also be used to pay yourself for work you’ve done to benefit your business; however, paying yourself is forbidden. To help differentiate the funds from the rest of your expenses, the SBA recommends keeping the EIDL money in a separate account.

What You Can’t Use An EIDL For

The SBA is pretty specific about what EIDL’s cannot be used for. Essentially, anything outside working capital is prohibited. This includes:

• Payment of any dividends or bonuses;
• Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to the performance of services for the benefit of the applicant
• Refinancing long term debt
• Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal;
• Expansion of facilities or acquisition of fixed assets

Accepting an EIDL will prevent you from participating in the PPP or Paycheck Protection Program. Similarly, receiving an EIDL may disqualify you from receiving unemployment related to the pandemic. If you are still uncertain about what you can and cannot use the EIDL for, you can always reach out to the SBA for clarification

EIDL vs. $10,000 Grant

In addition to EIDL’s, the CARES Act also included $10,000 disaster relief grants. Since then, the grants have been limited to $1,000 per employee. Unlike loans, grants do not have to be paid back and are not taxable by the federal government. These grants are advances for those who have previously applied for an EIDL and qualify, so no additional application is required. Your business must be located in a low-income community and have 300 employees or fewer to qualify for these grants.

How To Apply for an EIDL

Although the COVID-10 EIDL program was originally scheduled to end at the end of 2020, it has been extended through the end of 2021. Since EIDL’s are given out by the SBA, you’ll have to apply through the SBA. Luckily, this process has been streamlined and is estimated to take roughly 2 hours to complete. The application consists of:

• a disclosure explaining the conditions of the loan,
• a business information section where you will be required to provide your income statement as of January 1, 2020,
• a personal information section where you will provide things like your address, phone number, and social security number,
• and any additional information section about things like criminal charges.

The application can be found directly on the our Seek Government Funds application page and can be completed online.

The Bottom Line

While EIDL’s are a great resource to help struggling businesses survive the pandemic, at the end of the day, they are loans and come along with all of the logistics that a loan entails. Those looking for financial aid that will be fully forgiven should potentially look elsewhere. With the uncertainty created by the pandemic, you should make sure you have a clear picture of your finances in order to ensure that you will be able to pay the EIDL off. However, if the expenses you plan to use the EIDL for fall under the acceptable uses, and you see a future for your business after the pandemic with a little financial boost, applying for the EIDL may be just what you need. A little help can go a long way in these trying times, and educating yourself on what type of help you're eligible to receive is the first step. Sources: Table of Size Standards | SBA Disaster Loan Assistance | Covid-19 Relief Coronavirus Aid, Relief, and Economic Security (CARES) Act | Investopedia