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How Can My Business Spend the SBA Economic Injury Disaster Loan?

On March 27, 2020, the CARES Act modified the Small Business Administration's (SBA) Economic Injury Disaster Loan (EIDL) Program. The EIDL Program is the SBA's primary program for providing financial assistance to small businesses, nonprofit organizations, and small agricultural cooperatives that are in a disaster area and suffered substantial economic injury as a result of a disaster.

In the past couple of months, small businesses across the country have suffered substantial economic injury as a result of the Coronavirus (COVID-19). As a result, the SBA is offering low-interest federal disaster loans for working capital.

These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%.

If your business has been approved for an Economic Injury Disaster Loan, you should have received an email from the SBA prompting you to create an EIDL Portal Account. Once your account is set up and your supporting documentation has been submitted, you should receive a Loan Authorization Agreement outlining the terms of the loan.

What the Loan Authorization Agreement does not tell you is that there are specific limitations as to how you can spend your loan, which are outlined by federal code. You must use disaster loans to restore or replace your business as nearly as possible to its condition before the disaster occurred, and within certain limits, to protect damaged or destroyed real property from possible future similar disasters.

Pursuant to 13 CFR § 123.303, you can only use the loan proceeds for working capital necessary to carry your concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury, but not to exceed that which the business could have provided had the injury not occurred. Loan proceeds may not be used to:

  1. Refinance indebtedness which you incurred prior to the disaster event;

  2. Make payments on loans owned by another federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act;

  3. Pay, directly or indirectly, any obligations resulting from a federal, state or local tax penalty as a result of negligence or fraud, or any non-tax criminal fine, civil fine, or penalty for non-compliance with a law, regulation, or order of a federal, state, regional, or local agency or similar matter;

  4. Repair physical damage; or

  5. Pay dividends or other disbursements to owners, partners, officers or stockholders, except for reasonable remuneration directly related to their performance of services for the business.

If you wrongfully misapply the proceeds of a disaster loan, you will be liable to the SBA for one and one-half times the proceeds disbursed to you as of the date SBA learns of your wrongful misapplication!! You may also face criminal prosecution or civil or administrative action.

If you find yourself in a situation where you believe you may need legal assistance, contact Glover Court Solutions & Estate Planning to discuss your options. While, we cannot give legal advice, we can provide general legal information to help you navigate your case. We also network with dozens of qualified attorneys throughout the Valley whom we would be happy to refer you to in the unlikely event we are unable to help.

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