Economic Injury Disaster Loan Guide: What to Do When You Need a Disaster Loan
By: Kate Samano March 28, 2022When natural disasters hit, it can be financially devastating, both on an individual level and for business owners. Since 1980, the United States has had 308 weather and climate disasters where overall costs reached at least $1 billion. In 2021, there were 18 climate disasters with a cost of $1 billion or higher. The frequency and high cost of these events has resulted in the government creating economic injury disaster loans to help businesses survive and recover from these devastating events.Â
However, if you’ve never applied for economic injury disaster loan assistance before, you might feel overwhelmed by the entire process. You might be wondering how you’ll know if you qualify, how much you can receive, what repayments look like and how to apply. We’re here to answer all your questions for you, so you can feel prepared and get the help you need during this difficult time.Â
What Is an Economic Injury Disaster Loan?
An economic injury disaster loan (EIDL) is a type of Federal assistance offered through the Small Business Administration’s (SBA) disaster loans program. However, the EIDL is the only loan that isn’t limited to small businesses—some nonprofit companies with over 500 employees may still qualify.Â
The economic injury disaster loan is meant to help businesses that need to repair and rebuild after incurring disaster losses. The EIDL is only available to help with “non-farm, private sector disaster losses.”
Both small businesses and private, nonprofit organizations that have suffered substantial economic injury can apply. Qualifying businesses can receive up to $2 million; however, the actual amount will depend on the amount of economic injury suffered by the company.Â
EIDLs aren’t meant to replace lost sales or revenue. These loans are meant to help organizations meet the financial obligations the company would have met if the disaster hadn’t happened. The funding allows businesses to address economic injury caused directly by the disaster, so the company can get back to operations as quickly as possible.Â
It’s important to note that EIDLs aren’t for helping businesses cover the costs of physical damage. They’re for helping businesses pay bills so they can stay open. Companies with—and without—physical damage can apply for an EIDL.
What Qualifies as a Natural Disaster?
Before we look at the loan requirements, it’s important to note that you can only qualify for an SBA disaster loan if there’s been an official disaster. The Federally recognized definition of a disaster spans from natural to human-made. Examples of disasters include hurricanes, fires, flooding, tornadoes and civil unrest.Â
To qualify for the SBA loan, your business must be in an area that has been legally declared as a disaster area. You can find an up-to-date list of Presidential and SBA Agency Declared Disasters on the SBA website.Â
COVID-19
During the COVID-19 pandemic, the SBA included the pandemic as a nationally recognized disaster. American nonprofit organizations of any size, including agricultural businesses with 500 or fewer employees, that have suffered a substantial economic injury due to the COVID-19 pandemic can apply for the COVID-19 EIDL. Â
What Are the Requirements for a Disaster Loan?
To qualify for the economic injury disaster loan, businesses must meet the following requirements:
- The business must be located in a legally declared disaster area.
- The business must prove that it sustained a substantial economic injury due to the disaster and that the company is unable to meet its operating expenses.Â
- The business must demonstrate an inability to find funding elsewhere, except when applying for the COVID-19 EIDL.
- The business must meet collateral requirements for loans over $25,000, with real estate being the preferred type of collateral.
Your credit will play a role in whether you’re approved or denied for the loan. While the SBA doesn’t specify these requirements, it’s known that applicants should meet these standards to increase their chance of approval:
- For loans between $1,000-$500,000, a minimum credit score of 570
- For loans above $500,000, a minimum credit score of 625
- General credit requirements for all SBA loans state that satisfactory credit is necessary.
You can expect that you’ll likely be denied an EIDL if you have any of the following credit issues:
- Delinquent child support obligations of 60 days or more
- Federal debt judgments without a repayment plan in place
- Federal tax liens exceeding $10,000 without an explanation or repayment plan
Luckily, most other major adverse credit issues can be forgiven if the loan applicant has an explanation and their other accounts are in good standing.
The Pros and Cons of an Economic Injury Disaster Loan
As is the case with most financial products and services, the economic injury disaster loan comes with positives and negatives. All applicants should be aware of the benefits and drawbacks to determine whether this loan is right for them.Â
The Pros
Some pros of the EIDL are:
- Large Loan Amounts: Qualifying individuals can get hundreds, thousands or millions of dollars in funding.Â
- Low Interest Rates: Compared to loans offered by the banks or other lenders, the EIDL maintains a low interest rate. This loan cannot exceed 4% in interest.Â
- Repayment Length: Most EIDL repayment loan lengths are set to 15 or 30 years. This is much longer than standard loans from other lenders, which often have loan terms of 10 years or less.Â
- No Fees and Penalties: An EIDL doesn’t charge upfront fees or prepayment penalties.Â
Flexibility: Compared to the other SBA loans, the EIDL has a lot of flexibility on what the money can be used for, as it covers anything that falls under operating expenses.
The Cons
Some cons of the EIDL include:
- Complex Application: The application for an EIDL is lengthy and requires a lot of paperwork.
- Credit Check: Your business will need to have a credit check to be approved for the loan.Â
- Collateral: Applicants asking for a loan above $25,000 will need to provide collateral.
- Waiting: The approval process can take several weeks.Â
Non-Forgivable: Some loans, such as the PPP loan, are forgivable in some circumstances. Unfortunately, the EIDL isn’t, so you’ll have to pay it back.Â
Economic Injury Disaster Loans Terms
The general terms of an EIDL loan are:
| The general terms of an EIDL loan are: | |
|---|---|
| Maximum Loan Length | 30 years |
| Interest Rate | Varies, but cannot exceed 4% |
| Amount Given | Varies depending on the applicant’s needs but cannot exceed $2 million |
| Payment Frequency | Varies depending on the applicant |
| Prepayment Penalties | Varies depending on the applicant |
| There are no upfront fees or prepayment fees for SBA loans. | |
Applying for an Economic Injury Disaster Loan
You’ll need to have the following documents prepared to file your application:
- IRS Form 4506-T
- SBA Form 5 (Individuals applying as a sole proprietorship must submit SBA Form FC.)
- SBA Form 413 (Personal Financial Statement)
- SBA Form 2202 (Schedule of Liabilities)
- The three most recent years of business tax returns
- Any additional information that’s requested, such as Federal tax returns, year-end profit-and-loss statements, balance sheets, monthly sales figures and more.Â
What to Do When You Need a Disaster Loan
When you’re ready to apply for a disaster loan, follow these steps:
- Look over the eligibility requirements, and make sure you qualify.Â
- Review your credit score and financial status. If your credit has some negative detractors on it, consider whether you can fix them quickly or explain them.Â
- Prepare all the financial documents you’ll need for the application.Â
- Submit your application.Â
After you apply for economic injury disaster loan assistance, you should be prepared to wait. It’s unlikely that you’ll get your funds right away, and the SBA may even use the email address on file to contact you and request additional documentation.
The approximate timeline is three weeks for loans under $500,000 and six weeks for loans above $500,000.
Can I Pay Off My EIDL Early?
Yes, you can pay off your EIDL at any time without prepayment penalty fees. You can make a payment by phone, mail or online.Â
What Can I Spend My EIDL On?
When you finally get your EIDL funding, you might be wondering if there are any limitations about what you can spend the money on. Luckily, the EIDL is one of the least restrictive of all the SBA loans regarding how you can spend your money. EIDL funding is meant to cover your operational expenses, and therefore, can be spent on day-to-day expenses, such as:
- Accounting services
- Accounts payable
- Inventory
- Merchant fees
- Office supplies
- Rent and utilities
- Web hosting
You’re able to receive and apply for multiple SBA loans at once. For example, you may simultaneously apply for EIDL and a Business Physical Disaster Loan. However, if you receive numerous loans, you may need to follow the guidelines around what you can spend the funding from the other loans on.
Lendzi Helps Businesses Get Funding
Businesses can use Lendzi to compare lending options and get funding fast. Lendzi can help business owners apply for disaster loans, including the economic injury disaster loan. One loan application with Lendzi will get you access to over 60 lenders, so you can immediately review all the options available to you. Get started today.Â
About the Author
Kate Samano
Kate Samano is a copywriter and Head of Content at Lendzi. She believes in helping small businesses grow by providing access to viable financial advice.