Lesson 1: EIDL Fundamentals and Eligibility Requirements
Lesson Overview
Welcome to your specialized training on Economic Injury Disaster Loans (EIDL). The core objective of this lesson is to establish a firm understanding of the statutory framework, eligible entities, and strict exclusions that govern the EIDL program.
Chapter 1 Preview: This chapter explores the foundational elements of EIDL eligibility, including the types of entities that qualify, size standards, and location requirements.
Chapter 2 Preview: This chapter details the strict exclusions of the EIDL program, focusing on ineligible business activities and the impact of the Credit Elsewhere Test.
Chapter 1: Eligible Entities and Size Standards
As an SBA underwriter, you must first confirm that an applicant meets the foundational criteria to receive working capital assistance under Section 7(b)(2) of the Small Business Act. The EIDL program is designed to assist businesses that have suffered, or are likely to suffer, substantial economic injury as a result of a declared disaster. Eligible entities include small business concerns, small agricultural cooperatives, small businesses engaged in aquaculture, and most private non-profit organizations (PNPs) of any size.
To qualify, an applicant must demonstrate a physical presence within the declared disaster area; an economic presence alone is insufficient. Furthermore, you must verify the applicant’s size. The applicant business, including any affiliates, must not exceed the SBA size standard for the industry in which the applicant alone is primarily engaged, nor can the combined entity exceed the size standard for the primary industry of the affiliated group. You must also ensure the business is independently owned and operated, meaning the owners bear a business risk and are free from significant control by other concerns.
Chapter 2: Ineligible Concerns and Credit Elsewhere
Equally important to knowing who qualifies is knowing who does not. Certain business activities are strictly prohibited from receiving EIDL assistance. Ineligible applicants include lending or investment concerns, multi-level sales distribution (pyramid) concerns, speculative activities, gambling concerns, casinos, loan packagers, real estate developers, and government-owned entities. Additionally, businesses primarily engaged in agricultural enterprises are ineligible for EIDL, though an exception exists for small businesses engaged in aquaculture. When analyzing a business with multiple operations, you must ensure both the primary industry (the one producing the most revenue) and the loss activity are eligible.
A critical factor in EIDL underwriting is the Credit Elsewhere Test (CET). By statute, we must determine if the applicant has the ability to address the disaster loss from their own available resources or by obtaining credit from non-Federal sources at reasonable rates and terms. If your analysis concludes that the applicant, its principals, or its affiliates have Credit Available Elsewhere, the applicant is completely ineligible for EIDL assistance.
Executive Summary
The EIDL program provides essential working capital to eligible small businesses, agricultural cooperatives, aquaculture enterprises, and PNPs located within a declared disaster area. Underwriters must carefully screen for ineligible business activities, such as agricultural enterprises and gambling concerns, while ensuring size standards are met. Most importantly, any applicant determined to have credit available elsewhere is strictly barred from receiving EIDL assistance.
Study Guide
How does the SBA define the location requirement for an EIDL applicant, and does an “economic presence” satisfy this requirement?
Explain the difference between an agricultural enterprise and an aquaculture enterprise regarding EIDL eligibility.
If an applicant is determined to have Credit Available Elsewhere, what interest rate and maximum loan term must be applied to their EIDL?
When a business has multiple distinct operations, how does an underwriter evaluate the “business activity” to establish EIDL eligibility?
Lesson 2: Determining Economic Injury and Use of Proceeds
Lesson Overview
This lesson focuses on the quantitative analysis required to underwrite an EIDL, establishing how we measure economic injury and responsibly allocate taxpayer funds. The core objective is to master the processing methods used to calculate working capital needs and understand the strict limitations on how loan proceeds may be deployed.
Chapter 1 Preview: This chapter breaks down the Phase I and Phase II processing methods used to calculate the eligible EIDL amount based on lost sales and financial needs.
Chapter 2 Preview: This chapter details the authorized uses of EIDL proceeds and strictly outlines prohibited expenditures.
Chapter 1: Calculating Economic Injury (Phase I and Phase II)
Economic Injury (EI) is defined as a change in the financial condition of an eligible concern, attributable to the disaster, resulting in the inability to meet obligations as they mature or to pay ordinary and necessary operating expenses. The maximum legislative limit for disaster business loans, including EIDLs, is $2,000,000 for any one borrower and its affiliates.
To calculate the eligible loan amount, underwriters utilize two primary methods.
Phase I Method: This method provides immediate working capital and is capped at $300,000. It does not require a complex needs analysis. Instead, it measures injury by determining the normal annual sales and the normal Gross Margin (GM) percentage, making no adjustments to the Cost of Goods Sold. The Phase I EI computation is: (Normal Annual Sales x Normal GM %) ÷ 12 x 4.
Phase II Method: If the Phase I calculation exceeds $300,000, or if an increase is requested, the Phase II method is required. Phase II requires greater detail to identify essential needs and evaluate extended injury periods. Instead of GM, Phase II utilizes the Modified Contribution Margin (MCM). Under Phase II, you must calculate total financial needs (such as to-date needs, future needs, and extraordinary items) and compare it against the total economic injury. The final loan amount is limited to the lesser of the financial needs or the economic injury.
Chapter 2: Eligible and Ineligible Uses of EIDL Proceeds
Because EIDL funds are strictly intended to assist a business through the disaster recovery period until normal operations resume, the use of proceeds is highly regulated 16. You must ensure that the Loan Authorization and Agreement (LAA) specifically limits the use of proceeds to working capital, notes payable, and accounts payable.
You must be vigilant in preventing the misuse of EIDL funds. EIDL proceeds may never be used for the payment of any dividends or bonuses, nor can they be used for disbursements to owners, partners, or stockholders (except when directly related to the performance of services for the business). Furthermore, EIDL funds cannot be used to finance the expansion of facilities or the acquisition of fixed assets. They cannot be used to repair or replace physical damages, refinance long-term debt, or pay down loans owned by another Federal agency, including previous SBA loans. Finally, EIDL funds cannot be used to pay penalties resulting from noncompliance with any law or regulation, or to fund a business relocation.
Executive Summary
The eligible EIDL amount is determined through either a Phase I Gross Margin calculation for loans up to $300,000 or a detailed Phase II Modified Contribution Margin and needs analysis for larger requests. Loan proceeds are strictly restricted to covering working capital, notes payable, and accounts payable necessary to sustain the business. Underwriters must ensure funds are never used for physical repairs, expansion, dividends, or the refinancing of long-term and federal debt.
Study Guide
Under the Phase I processing method, what formula is used to compute the economic injury, and what is the maximum loan limit for this phase?
Why does the Phase II method require a “needs analysis,” and how does this analysis limit the final loan amount?
List at least four strictly prohibited uses of EIDL proceeds as defined by SBA regulations.
If a business applicant wishes to use EIDL proceeds to repair a disaster-damaged roof and purchase new machinery, how should the underwriter respond based on the use of proceeds guidelines?