6 things you need to consider before applying for Economic Injury Disaster Loan
Economic Injury disaster loans are handy when you feel the need to get the funds for recovering from any damage or loss caused by any declared disaster in your businesses’ residence. There may be several reasons for you applying for the loan. However, in our understanding, you should consider the following 6 things before applying for the EIDL.
Do You Really need an EIDL loan?
Before going for an EIDL loan, consider whether you have tried any other available options or not, especially the PPP. If you have not received a loan under the Pay Protection Program, this is the first reasonable opportunity for you to explore because you can waive the full PPP loan (unlike economic injury disaster loans eidl, which cannot be forgiven).
However, if you think you still need the funds in addition to PPP, then EIDL is a great option to go for. The reason for this is that the interest rates are extremely low. Following are some liberties offered by SBA in case of EIDL loans that you need to know:
- 3.75% for companies
- 2.75% for non-profit organizations
- Long payback periods (15-30 years)
- You don’t have to pay the down payment for 12 months.
In addition to this, the company’s current situation should also be considered in terms of cash flow. If you want your income to be repaid quickly, you may not need a loan. Make the most out of this opportunity and determine whether you need to raise funds in the near future or not?
There is another most essential thing that you need to know about EIDL, and that is these EIDL loans cannot be used to purchase capitalized assets; new vehicles, new pieces of equipment, and also new locations. So, they should only be taken if you desire to maintain your daily operations.
What if you have been operating with PPP at the same time?
When you are applying for the EIDL loan, it is crucial to consider whether you are operating with the PPP at the same time. However, here is something great for you. You
You can get benefits from both the PPP and EIDL funds at the same time. However, if you are operating both programs simultaneously, you need to keep two things in mind.
1. The EIDL subsidy reduces the reduction or exemption you are entitled to in PPP loans. For example, if your PPP loan is US$10,000 and your EIDL support is US$1,000, you can only waive a PPP loan of US$9,000.
2. You cannot use the money for the same expenses. If you have received a PPP loan but have not yet applied for forgiveness, you cannot use EIDL funds for the following types of expenses:
- Salary management
- Interest portion of mortgage payment
Will you be able to avoid spending your EIDL loan on the following things?
EIDL can be used for any needs of your business’ daily operations. This means that you have a lot of freedom in its use, but there are some expenses that you cannot do through the EIDL funds. If you intend to use the money for any of the following, EIDL is not suitable:
- Dividends and remuneration
- Payment to the owner (lottery and distribution), unless directly related to the service
- Repayment of shareholders loans
- Expansion of facilities or purchase of fixed assets (for example, equipment, such as new cameras)
- Recover or repair the personal injury
- Refinancing of long-term debt (for example, repaying large credit card debts)
As mentioned above, if you currently have a PPP loan, you cannot use EIDL funds to pay for the use of the PPP loan. If you have received a PPP loan, please consider all your expenses that do not fall under eligible funds from PPP.
Will you be able to provide the collateral?
Collateral is only required when you are applying for loans over US$25,000, and personal subsidies are required for loans over US$200,000. If you are not satisfied with providing the collateral, you can choose to charge a fee lower than that amount when bidding. Although limited to a small amount of credit, you can also promise a loan that is valid for you and your company.
However, it is unusual that SBA checks for collateral. But, there still are chances that it may check your personal or business credit card to develop the trust for your creditworthiness. However, if you don t have enough property to serve as collateral, it still won’t decline your disaster loan application and may ask you to present any form of collateral that is available with you. It can be real estate that is originally owned by the business’ principals.
Can You Afford a Credit Check?
The EIDL application requires a credit check as part of the loan seeking process. If you are in a situation where this could risk your credit score, consider whether the potential funds provided by them are worth it at the time of your need or not.
Consider whether you can get another loan on your balance sheet?
EIDL’s interest rate is only 3.75% and just 2.75% for non-profit organizations, but the loan term is 15 to 30 years, which seems scary for making long-term commitments on the balance sheet. However, EIDL can be paid early, with no fines and no additional fees. This means you can choose the right loan amount and repay the loan on time. Although you cannot request an amount greater than the amount provided, you can accept a lower amount and choose when to pay the full amount.
Should you go for the EIDL Grants?
This was a one-time emergency subsidy of US$1,000 per employee to the EIDL program, once introduced by the CARES Act. It could go up to a maximum of US$10,000. It is vital to consider that if you have also received a PPP loan, the EIDL grant will reduce the U.S. dollar portion of the PPP loan. There are currently no clear regulations on the use of EIDL grant funds. CWA puts forward that these funds can be spent for any permitted use of the EIDL.
So, try to make your mind beforehand whether you will be able to handle the terms of the grant or not. If not, then you must reconsider your EIDL loan seeking a decision.
Is EIDL really helpful?
EIDL program is really helpful as it allows the business persons to use the fund for almost all the general expenses for your damaged business, including:
1. Supply purchases
2. Personal protective equipment purchase
3. Lab expenses
4. Regular loan principal payments
6. Some other useful fixed expenses
How to Apply For EIDL
Although applying for the EIDL is not as difficult as most people think of it. Still, if you won’t go for an effortless loan application process, we would suggest you go for the online process. Follow the below mentioned simple steps to get an easy ad fastest access to the lenders:
- Federal Emergency Management Agency Registration: Before you ever plan to begin your application process, make sure to obtain a FEMA registration number. This, you will get after registering with them. You can visit their official site to get the registration process done and obtain the registration number.
- Collect Information: The application will need your social security number, contact number, lease information, FEMA registration number, financial information, and employer identification number. The application will also require you to complete IRS Form 4506-T, which allows the SBA to get access to all your tax returns. So, keep all the information with you ready before you sit down to fill the application to get the loan.
- Complete the application: Complete your application by filling out all the necessary details required, including the declaration of the disaster. After completing filling the application, submit this application. Wait till the SBA reviews your application and the credit report.
- SBA estimation process: After reviewing your application, SBA will draw and estimate the total damage done to your property or the organization.
- Loan Closing Documents: After that, all the procedure has been done, make sure to complete all the loan closing documents that will be sent to you by SBA after reviewing our application with great care. After you have completed and signed the documents and SBA receives them, it will provide you the initial amount within five days of the submission. You will get an estimate of $25,000 for the physical damage and the same for the economic injury.
- Case Manager Assistance: SBA will assign a case manager to you that will make sure that you get the full loan amount. This loan manager will also assist you in completing all the loan conditions.
So, here you are done with submitting the application, as well as the rest of the process that will help you to be confident in involving all the process.
Some other considerations for Economic Injury Disaster Loan
Divide EIDL credit income into separate accounts
In addition to operating accounts and PPP accounts, it is recommended to divide EIDL credit income into separate accounts. As with PPP, the use of EIDL funds must be recorded and supported. If you need to send this document to SBA, make sure to keep clean records and receipts.
First Use the PPP Funds
The EIDL program is an excellent opportunity for entrepreneurs to obtain liquidity and cash flow flexibility during uncertain times. We recommend that you first use the PPP loan to pay the qualified fees and then use the EIDL loan to complete and pay off the loan. As your business continues to grow over time and debt payments increase, these two loans can be used to cover overhead costs, allowing you to create more cash flow in practice and possibly pay off existing debt.
If you have also received a PPS loan, there are some other restrictions, as the SBA guidelines state that EIDL and PPP payments cannot be used for the same purpose. Therefore, borrowers with PPP loans cannot use EIDL income for PPP value expenditures, which may include salary costs like employment pensions and employment collective health benefits, utilities, rent, or loan interest.
EIDL or PPP which one to go for?
When you decide to choose between PPP and EIDL, we suggest you first consider your needs for choosing to opt for the loan. Let us illustrate.
You should apply for an EIDL loan if:
- You need assistance in paying all your business’ operating expenses like rent, utilities, payroll, etc., that are affected by the Covid-19 pandemic onset.
- If you clearly understand the loan repayment process and that you must have to pay it back at any cost.
- You are not sure whether you will be able to maintain your business’ expenses under the disaster.
- Also, if you see, you have various other significant expenses operating apart from the payroll.
You should go for a PPP loan if:
- Due to business decline related to COVID-19, salary assistance is needed in the next 24 weeks
- With the financial support of an eight-week salary, you expect to retain most or all full-time employees
- You know you can use up to 40% of the loan for subprime expenses
- You understand that if you don’t maintain the payroll, you will have to return back some of the amounts of the loan.
Some Final Words
We feel these disaster loans are perfect for you in this time of need when like any other small business in the industry, is subjected to the Covid-19 disaster. Amidst all this, a deadly and dramatic situation, along with taking care of your health, securing your financial assets should be your top priority, which you can do with these Economic Injury disaster loans.