What is an Economic Injury Disaster Loan?

In uncertain times, how does a small business owner keep a business running? Businesses have suffered through months of state-mandated closures, limited interactions with customers as a result of the pandemic, and now the effects of mass protests. Many shop owners are turning to economic injury disaster loans in hopes of staying afloat during these unpredictable times.

This year alone, more than 1.3 million economic injury disaster loans have been approved, providing nearly $91 trillion in financial support for the small businesses that desperately need it. The Small Business Administration has provided this type of financial support to businesses, but it’s not limited to traditional storefronts. Here’s a breakdown of what an economic injury disaster loan is and the different types of businesses who may be eligible.

What exactly is an Economic Injury Disaster Loan?

An economic injury disaster loan (EIDL) is a federal assistance program that provides loans to businesses that have suffered economic injury as a result of a declared disaster. The program provides loans up to $2 million for business owners at relatively low interest rates. In order to receive assistance, you will need to apply for the loan through the Small Business Administration.

It’s important to understand that economic injury doesn’t necessarily mean that your business has suffered physical damage from a fire, a hurricane, or a rock through your window. It simply means that your business can’t meet its obligations, including ordinary and necessary operating expenses as a result of the disaster. This includes the inability to pay your employees or cover the cost of bills needed to run your business each day.

You may also get a loan advance

This year, in addition to receiving funds through an EIDL, businesses can also apply for an EIDL loan advance up to $10,000 if the business has been impacted by COVID-19. The good news is that this advance does not have to be paid back; it simply gets deducted from your total loan eligibility. This additional benefit could help during a declared disaster.

What counts as a declared disaster?

A declared disaster includes natural disasters like fires, tornadoes, and severe flooding, but it can also include pandemics. Disaster declarations are often made by the President of the United States, though state governors can declare a state of emergency that can further support the need for federal assistance.

On January 20, 2020, FEMA announced that federal emergency aid would be available to all 50 states, the District of Columbia, four territories, and 32 tribes under the declaration for COVID-19. That means federal funding can be used by state and local governments to provide support on an individual level and to small business owners.

The recent nationwide protests have left some businesses wondering if they could take advantage of EIDLs to recoup costs from damage done to their brick and mortar stores. Unfortunately, no such disaster declarations have been made associated with the protests and resulting property damage at the time of this publication, which prevents small business owners even in heavily impacted neighborhoods from receiving this kind of assistance.

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Who qualifies for an Economic Injury Disaster Loan?

There are a few forms of federal financial assistance, ranging from the Paycheck Protection Program to unemployment benefits. Not all businesses can apply for an economic injury disaster loan, so make sure you meet these qualifications first:

• Your business has less than 500 employees.

• Your business is one of the following:

  • For-profit business or cooperative

  • A private non-profit organization

  • Agricultural enterprise

  • Individual that operates as a sole proprietorship or independent contractor with or without employees

  • Tribal small business

• Your business is not involved with lobbying, illegal activity and does not derive more than one-third of its revenue from legal gambling activities.

Even if your business may be eligible, it’s not a quick process to apply for an EIDL. In fact, the SBA warns applicants that the entire application can take up to two hours and ten minutes to fill out. Before you apply, you’ll need to gather a few tax and accounting forms, including your federal income tax return, current year-to-date profit-and-loss statement, and the last three years of monthly sales figures.

Pros of a loan

Your EIDL eligibility is dependent on your business financials. If there is a drastic difference between what your business looked like before and after the disaster, the benefits of an EIDL could provide some breathing room. Pros of receiving a loan include:

• You may borrow up to $2 million. Repayment terms can be up to 30 years, depending on your situation.

• Not limited to just small businesses. Independent contractors and sole proprietorships, such as freelancers, are eligible for an EIDL as long as they meet the criteria.

• No upfront fees or early payment penalties. There is no penalty for paying off an EIDL early when your business returns to normal.

• Interest rates are low. Interest rates for small businesses are 3.75% and 2.75% for private non-profit organizations.

Cons of a loan

Although an EIDL can come in handy during a disaster, there are a few cons to take note of before you apply.

• Does not replace lost sales or revenue. The loan is meant to cover financial obligations during the disaster that your business otherwise could have met under normal circumstances, not replace sales you lost.

• EIDLs over $25,000 require collateral. The SBA takes real estate collateral or requires borrowers to pledge what is available if there is no real estate to secure the loan.

• Cannot use the loan for repair or replacement of physical damages. Funds from an EIDL can only be used to cover necessary operating expenditures.

• Adds to your debt balance. While you may be able to find financial relief temporarily, you’re still on the hook to repay an EIDL which can add to your overall debt balance.

Other options to use

If an EIDL just isn’t the right solution to help your business survive, there are other options you can look into such as:

Paycheck Protection Program

The Paycheck Protection Program (PPP) aims to keep employees on payroll and cover overhead costs. PPP has been extended to the end of the year and provides additional small business debt relief. Coverage includes an extended repayment period, forgivable overhead costs, and more debt relief support.

SBA Express Bridge Loans

If you already have a relationship with an SBA Express Lender, you may be able to access up to $25,000 right away using an SBA Express Bridge Loan. You can use this money to hold you over while you apply for an EIDL.

SBA Debt Relief

If you have a 7(a), 504, or microloan through the SBA, the administration will pay six months of principal, interest, and fees that you may owe. The payments will be made automatically through SBA debt relief, but note—this does not apply towards PPP or EIDL.

Rethink your business operations

If you have exhausted your resources or waiting to hear back, now may be the time to rethink your business operations. How can you get creative with generating revenue again? Offer products and services virtually, provide gift card options, or create a crowdfunding page. Amplify your efforts with your social media or email marketing, like this San Diego donut shop, to get your customer base to support your business.

When personal debt piles up

When business owners start relying on their personal credit cards to make ends meet for their business, the debt can quickly grow and there could be fewer options for resolving it. If you are struggling with personal credit card debt due to pandemic or some other hardship, you might qualify for a debt relief program through Freedom Debt Relief. Our Certified Debt Consultants can help you find a solution that will put you on the path to a better financial future. Find out if you qualify right now.

Learn more:

• 5 Strategies to Help Manage Small Business Debt (Freedom Debt Relief)

• How to Ask Creditors for Loan and Credit Card Forbearance (Freedom Debt Relief)

• Debt Relief for Small Business Owners (Freedom Debt Relief)

• SBA Approving Economic Injury Disaster Loans (EIDL): What You Need to Know (Forbes)