My successful Economic Injury Disaster Loan story

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I’ve been looking forward to this post for over a month, so I’m glad to finally be able to write up the complete story of my Economic Injury Disaster Loan. I know a lot of people are at different stages of the process, so hopefully this will be a useful guide for what to expect, particularly if Congress ends up appropriating additional money for the program in a future disaster relief bill.

The timeline

Obviously this is the issue people are most concerned about: how long should you expect to wait between submitting an application and reaching the end of the loan disbursement process?

Here was my experience:

• March 29, 2020: I submitted my initial application within a few hours of the EIDL portal going live. The application was extremely simple, essentially asking for your business structure, number of employees, and your income in either the previous year or previous quarter, which was easy enough to pull up from my records. They warn it can take 2.5 hours to complete but I’d be shocked if it took me 10 minutes.
• April 13: received e-mail from the Small Business Administration confirming that the EIDL “advance” grant would be limited to $1,000 per employee. This had been left ambiguous in both the underlying legislation and on the EIDL application, with both saying only that the advance would be “up to $10,000.”
• April 15: received $1,000 advance by direct deposit.
• May 8: received an e-mail invitation to create an account at covidrelief1.sba.gov, created the account and confirmed my identity.
• May 9: received approval and e-mail invitation to complete my loan documents.
• May 11: completed my loan documents.
• May 12: received my loan proceeds by direct deposit.

The mystery of the EIDL “advance” — solved!

All things considered, this was an extremely simple and painless process, although obviously it would have been nice if the money had gone out a little quicker. The one source of universal confusion about the EIDL program relates to the co-called “advance,” in my case the $1,000 I received on April 15.

In ordinary life, if someone gives you an advance on a loan, the amount of the advance is part of the loan. Sometimes it’s the entirety of the loan, as in the case of a “paycheck advance loans,” for instance.

It was widely known and reported that the EIDL advance doesn’t have to be repaid if you aren’t ultimately approved for a loan. The obvious question was, would an EIDL advance have to be repaid if you are ultimately approved for a loan?

In my case, I received a $1,000 advance and was approved for a $3,000 loan. What I wanted to know was, if I accepted the loan, would I only receive an additional $2,000, having already received $1,000 of my $3,000 loan? In that case, I’d turn down the loan, since there’s no reason to elect to repay $1,000 that would otherwise be free and clear.

To get a definite answer, I called the Small Business Administration, where someone immediately answered the phone (on a Saturday afternoon, no less) and assured me that the EIDL “advance” has nothing to do with the loan: it’s free money. I’d receive the full $3,000 loan, and only have to repay the $3,000 loan. That was reassuring, but I wasn’t completely convinced, given how new the program is. Ultimately, to get a definite answer, I’d have to complete the loan documents.

Fortunately, the agent was right, and the full $3,000 loan was deposited this morning.

EIDL and Paycheck Protection Program loan interaction

If you’re happy with the terms of your EIDL loan, that’s all you need to know: a 30-year, unsecured loan at 3.75% APR, with no origination fees and no prepayment penalty sounds pretty good to me!

Larger business, and those with more employees, do have another option to consider: converting an EIDL loan to a 2-year Paycheck Protection Program loan.

Why would anyone convert a 30-year loan into a 2-year loan? The reason is that unlike EIDL loans, your PPP loan balance is forgivable if the money is spent on eligible expenses, principally maintaining your pre-crisis payroll (hence the “Paycheck” in “Paycheck Protection Program”).

Here’s where it gets tricky: if and only if you pursue a PPP loan after receiving an EIDL advance, then the amount of the EIDL advance reduces the forgivable amount of your PPP loan. An employer that received a full $10,000 EIDL advance, then decided to switch over to PPP and borrowed an additional $30,000, would only be eligible for $20,000 in PPP loan forgiveness. On the one hand, you can see the logic here: the employer didn’t “really” borrow $30,000, they only borrowed $20,000: the extra $10,000 can be repaid from their EIDL advance. On the other hand, this design choice leaves employers with a complex decision between the two programs.

Let’s illustrate this with some numbers:

• Company 1 receives a $10,000 EIDL advance and a $30,000 EIDL loan from the Small Business Administration. The $30,000 loan has to be repaid over 30 years, with the first payment deferred for 1 year. The money can be spent to “meet financial obligations and operating expenses that could have been met had the disaster not occurred.”
• Company 2 receives a $10,000 EIDL advance, then decides to proceed with a PPP loan application and receives a $30,000 PPP loan from a private lender. Within 8 weeks of receiving the loan, Company 2 spends at least 75% of their loan on maintaining their number of staff and level of payroll, and the rest on mortgage interest, rent, and utilities payments. Company 2 then requests loan forgiveness from their private lender, and receives $20,000 in loan forgiveness: the amount of their PPP loan, reduced by the amount of their EIDL advance, which they can use to repay the remaining $10,000 loan, or to meet other expenses.

Deciding between the programs: easy cases and hard cases

A lot of people are struggling to decide between EIDL and PPP loans, and rightly so: the programs are very different, and while not technically mutually exclusive (you can take out loans from both programs, under certain conditions), most businesses will only take advantage of only one or the other. That being said, let’s get the easy cases out of the way:

• PPP: labor-intensive business that remain open. Consider a dog-walking service that pays out virtually 100% of its expenses for labor, and continues to see similar demand during the pandemic; PPP loan forgiveness makes 8 weeks of payroll the government’s problem, and turns the firm’s entire revenue into pure profit. You can also include here less labor-intensive businesses that nonetheless have a lot of payroll expenses, like independent grocery stores and co-ops, local gas stations and convenience stores, liquor stores and takeout pizza parlors. Labor may not be the biggest cost center for these business, but it’s a large expense that can be wiped away with a PPP loan, giving the business temporarily expanded profit margins.
• EIDL: capital-intensive, low-margin businesses. Obviously the biggest problem with PPP loans is that the forgivable amount is contingent on your pre-crisis payroll. If you don’t plan on pursuing PPP loan forgiveness, then the program simply offers a low-interest, short-term loan. Most low-margin, part-time, and hobbyist sole proprietors will be better off with an EIDL loan, with its free advance, low interest, and long repayment period.

If the world were composed of only easy cases, our work here would be done. Unfortunately, most businesses don’t fall into those two buckets. Consider a harder case:

• Closed businesses that rely on specialized labor. An example here is something like a high-end sushi restaurant that has recruited or trained skilled sushi chefs, but relies entirely on customers dining in, and has closed for the duration of the crisis. Taking out a PPP loan allows this business to maintain its payroll for free, but only if ongoing mortgage, rent, and utility payments represent less than 25% of their total expenses. If those expenses exceed 25%, the loan will be ineligible for forgiveness, or the investors will have to pay them from other sources, like savings or new capital. The less certain they are of reopening, the less willing they should be to do so, and the more attractive an EIDL loan becomes.

Conclusion: these are business loans, not worker loans

Since these loan programs received an enormous amount of the money made available in our pandemic recovery laws so far, they’ve naturally received a lot of attention from the media, which have unfortunately tended to treat them as designed, in different ways, for the benefit of employees.

This is a mistake, because neither of these programs is designed to benefit workers in any way: workers simply don’t get a say in which program their employer participates in. On the contrary, an employer’s decision to pursue one program or the other can materially harm the worker’s interests: a low-wage employer who chooses to maintain payroll makes their employees ineligible for expanded unemployment insurance!

Here’s a simple rule of thumb I like to keep in mind: the working class is not the beneficiary of systems that are not designed and led by the working class. Or even more concisely: “nothing about us, without us.”

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