This post was updated on April 24, 2020.
The COVID-19 health crisis has rocked the restaurant industry. Sales in regions heavily affected are down as much as 75%, which puts thousands of restaurants, millions of jobs, and local economies at risk. During the past two weeks alone, major cities like New York, San Francisco, Philadelphia, Seattle, and Denver have seen more than 80% declines in sales compared to last year.
Now, faced with the possibility of defaulting on rental contracts and bills and even shutting their doors, many restaurant owners and operators are seeking government support.
Because the COVID-19 health crisis has been designated a “major disaster” by the federal government, the U.S. national budget can be used for efforts that assist both individuals and businesses through the economic hardship created by this crisis.
DISCLAIMER: This article is for informational purposes only and is not legal advice. If you have specific legal or tax questions, you should consult your attorney or tax advisor, as appropriate. Toast is not affiliated with the United States Small Business Administration (“SBA”), and does not act as a lender or referral agent for SBA lenders. SBA loan programs are subject to eligibility. Please consult with a counselor for the SBA or a licensed SBA lender for additional information.
And just so you know, information about the CARES Act is rapidly emerging, with new information coming out every day. This information is up to date as of the date at the top. We will do our best to provide you with updated information as it becomes available to us.
What is an SBA Economic Injury Disaster Loan (EIDL)?
For small businesses in declared disaster areas, a federal program has been activated by the SBA called Economic Injury Disaster Loans (“EIDL”). EIDLs help to offset economic loss. The SBA is providing access to low-interest disaster loans for small businesses of all sizes, in eligible areas. All 50 states have been declared disaster areas and are considered eligible areas.
For restaurant businesses, an EIDL is an affordable way to get working capital to help recover from the economic losses caused by the COVID-19 health crisis. Interest rates on EIDLs do not exceed 4% per year (they are currently 3.75% for for-profit businesses and 2.75% for non-profits), the term can be up to 30 years, and the loan amount available is up to $2 million.
The CARES Act made some changes to EIDLs, including relaxed eligibility requirements, which have been outlined below. In addition to the changes made to the EIDL program, the CARES Act provides small businesses with access to SBA loans called Paycheck Protection Loans (“PPLs”), that permit certain amounts to be forgiven if used for payroll, utilities, interest on a mortgage, or rent. Small businesses are able to have an EIDL, in addition to a PPL, provided the loans are not used for the same purpose. On April 16, 2020 the Paycheck Protection Program had exhausted its initial $349B in funding, however, on April 24, 2020, the U.S. federal government passed a law approving an additional $310B for the Paycheck Protection Program.
The CARES Act makes it possible for small businesses that apply for an EIDL between January 31, 2020 and December 31, 2020 to request a grant of up to $10K. According to the SBA, eligible small businesses will receive the grant within days of applying for an EIDL, assuming the small business meets the eligibility requirements for an EIDL. The business will not need to repay the grant, even if the EIDL application is later denied. The grant funding can be used for any purpose that any COVID-19 related substantial economic hardship that an EIDL could be used for, including:
Providing paid sick leave to employees unable to work due to COVID-19
Maintaining payroll to retain employees during business disruptions or substantial slowdowns
Meeting increased costs to obtain materials unavailable from the the original source due to interrupted supply chains
Making rent or mortgage payments
Repaying obligations that cannot be met due to revenue losses
Small businesses can apply for an EIDL in addition to a PPL, provided the loans are not used for the same purpose. A small business that received an EIDL between January 31, 2020 and April 3, 2020, can refinance their EIDL into a PPL. Refinancing from an EIDL to a PPL could be beneficial because PPL amounts used for specific purposes during the eight weeks after the loan is made can be forgiven if used for specific purposes. If a business receives a $100,000 EIDL in February to use for payroll costs through the summer, the business could refinance the balance of the EIDL into a PPL and be eligible to have the portion of the loan spent on payroll costs for the next eight weeks forgiven.
Just keep in mind, if you have received an advance grant in connection with your EIDL (as described above, up to $10,000) and used it for payroll costs, that amount will be reduced from the amount available to be forgiven.
There are a few things to consider when deciding whether to refinance an EIDL into a PPL:
EIDLs allow you to defer principal and interest payments for up to four years, whereas you can only defer PPLs for six months.
EIDLs have a maximum term of 30 years (based on the financial condition of the borrower), while PPLs have a maturity of two years. If a business receives the EIDL grant (up to $10K) and later refinances the outstanding balance of the EIDL into a PPL (available for those who received an EIDL between January 31, 2020 and April 3, 2020), the amount of the grant that is spent on payroll costs will be subtracted from the amount forgiven.
Applying for an EIDL
As of April 16, 2020 the SBA was no longer accepting new applications for EIDLs based on the large number of applications for a specific amount of allotted funds, however, on April 24, 2020 the U.S. federal government signed into law an additional $10B for Economic Injury Disaster Loan grants, and $50B for Economic Injury Disaster Loans. Applications for an EIDL can be completed directly on the SBA website.
To expedite an application, be prepared to supply the following information required by these key forms:
SBA Form 5: Disaster Business Loan Application
SBA Form 413: Personal Financial Statement. One form is required for each applicant, each limited partner who owns 20% or more interest, each general partner, and each stockholder owning 20% or more voting stock.
IRS Form 4506-T: Tax Information Authorization. You may not be required to provide this form.
SBA Form 2202: Schedule of Liabilities
SBA Form 1368: Additional Filing Requirements for EIDL
Monthly financials to allow the SBA to conduct the economic injury analysis of pre- and post-disaster revenues.
The CARES Act has waived certain standard EIDL requirements to benefit businesses experiencing substantial economic hardship due to COVID-19. Unlike typical EIDLs, a COVID-19 impacted small business is not required to be unable to obtain credit elsewhere, to provide collateral or a personal guaranty, except for loans in excess of $200K (which will require a personal guaranty by an owner), or to be in operation for one year prior to the disaster provided the business was in operation by January 31, 2020. Also, the business is not required to provide tax returns to demonstrate an ability to repay.
Generally, the following eligibility criteria for businesses applying for EIDL still apply:
The business must be physically located within a state declared a disaster area by the SBA (businesses in all 50 states are eligible to apply).
The business must have suffered, or is likely to suffer, substantial economic injury as a result of the disaster.
The business must have good credit and an ability to repay.
Small businesses with not more than 500 employees (although this requirement has been relaxed from traditional sizing requirements)
The EIDL Application Process
1. Apply for the loan [Source]
You can apply on the SBA’s secure website, in-person at a disaster center, or by mail. You may contact the SBA by phone (1-800-659-2955), or email (email@example.com). As an eligible small business, you may apply for a maximum disaster loan limit of $2 million.
2. Loan is processed and verified [Source]
The SBA reviews your business and personal credit to assess creditworthiness and ability to repay. An SBA loan officer will determine your eligibility during processing, after reviewing any credit available elsewhere, application materials and other eligibility criteria. They will work with you to provide all the necessary information needed to reach a loan determination.
Collateral may be required for EIDLs greater than $25,000.00.
The SBA has a goal of arriving at a decision on the application within two to three weeks. A loan officer will contact you to discuss the loan recommendation and your next steps. All loan decisions will be provided in writing.
3. Close on the loan and receive the funds [Source]
If your loan is approved, the SBA will prepare and send you loan closing documents for your signature.
Once they receive your signed loan closing documents, an initial disbursement will be made to you within five days. A case manager will be assigned to work with you to help you meet all loan conditions and schedule subsequent disbursements until you receive the full loan amount, if applicable.
Source: Small Business Administration, www.sba.com
†Payroll costs include 1) salary, 2) wage, 3) commission or similar compensation, 4) a cash tip or equivalent, 5) payment for vacation or parental, family, medical or sick leave, 6) allowance for dismissal or separation, 7) payments for group health care benefits (including insurance premiums), 8) retirement benefits, 9) state and local taxes assessed on employee compensation (prorated for the February 15, 2020 - June 30, 2020), and 10) compensation to sole proprietors, independent contractors, or self-employed individuals (including commission-based compensation, up to $100K.
††Rent and mortgage agreements must be in force prior to February 15, 2020; utilities consist of expenses for electric, water, transportation, telephone, gas and internet, and services must have begun prior to February 15, 2020.