What is an Economic Injury Disaster Loan?

Owning a business can be personally and financially rewarding. It gives you an opportunity to make a living delivering a product or service people need, while possibly bringing new jobs to your area. But what happens when your business is threatened by a disaster like a wildfire or a flood?

You may be able to rely upon insurance, but there's another option that might be available to you: an Economic Injury Disaster Loan (EIDL). If you're a small business owner, this could be the best way to get the money you need to keep your business going while you try to reach a new normal. Here's a closer look at the basics of economic injury disaster loans so you can decide if one is right for you.

What is an Economic Injury Disaster Loan (EIDL)?

An Economic Injury Disaster Loan (EIDL) is a small business loan for those who have suffered economic injury as a result of a declared disaster. This includes natural disasters like fires, tornadoes, and severe flooding, as well as pandemics. Disaster declarations are often made by the President of the United States, though state governors can declare a state of emergency that can further support the need for federal assistance.

EIDLs aren’t debt relief. The EIDL program provides loans up to $2 million at relatively low interest rates. To receive assistance, you apply for the loan through the Small Business Administration (SBA).

If you experience damage to your buildings or business property as a result of a declared disaster, you could apply for repair assistance through a related program, the business physical disaster loan from the SBA.

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Who qualifies for an Economic Injury Disaster Loan (EIDL)?

To qualify for an EIDL, you must meet the following criteria:

• You run a small business, a small agricultural cooperative, or a private nonprofit organization.

• Your business is unable to meet its financial obligations and pay its regular and necessary operating expenses as a result of the declared disaster.

• Your business is physically located in the disaster area.

• The SBA determines that you're unable to qualify for credit elsewhere.

These loans are intended to cover things like the continuation of health insurance benefits for employees, rent and utilities on your buildings, and fixed debt payments.

EIDLs don't cover loss of expected profits or a decline in sales. You also can't use them to expand your facilities, buy fixed assets, repair physical damages, refinance debt, pay out dividends or bonuses, or repay loans to shareholders or principals. 

How do Economic Injury Disaster Loans (EIDLs) work?

You can apply for an EIDL online through the SBA website. First, you select the disaster that's affected you. Then you provide more detailed information about yourself and your business, including your financial obligations.

The SBA determines if you're eligible. If you are and you accept a loan, you can defer your first payment for 12 months. Your balance doesn't accrue interest during this time. After the first year, any remaining balance accrues interest, but the interest rate won't exceed 4%.

Economic Injury Disaster Loans can have terms of up to 30 years, but it's up to the SBA to determine your repayment schedule based on its estimate of your ability to repay. You're also free to pay off the loan early. There aren't any fees or penalties to do so.

If you borrow more than $50,000, you’re required to pledge some collateral. This is something you give a creditor permission to take from you and sell if you're not able to keep up with your loan payments. 

You may have to pledge your primary residence as collateral if you borrow more than $200,000. However, those borrowing less than this could use other assets of equal or greater value to the loan amount.

Pros of an Economic Injury Disaster Loan (EIDL)

There are several benefits to taking out an Economic Injury Disaster Loan, including:

• Borrowing up to $2 million. Repayment terms can be up to 30 years, depending on your situation.

• No upfront fees or early payment penalties. There is no penalty for paying off an EIDL early.

• Low interest rates. Interest rates for EIDLs don’t exceed 4%, which may be lower than what a bank would offer you.

Cons of an Economic Injury Disaster Loan (EIDL)

Although an EIDL can come in handy during a disaster, there are a few cons to take note of before you apply.

• Can't replace lost sales or revenue. The loan is meant to cover financial obligations during the disaster that your business could have met under normal circumstances, not replace sales you lost.

• EIDLs over $50,000 require collateral. The SBA takes real estate collateral, or requires borrowers to pledge another asset if there's no real estate to secure the loan.

• Can't use the loan for repair or replacement of physical damages. Funds from an EIDL can only be used to cover necessary operating expenditures.

• Adds to your debt balance. While you may be able to find financial relief temporarily, you’re still on the hook to repay an EIDL, which can add to your overall debt balance.

Other Options to Consider

If an EIDL just isn’t the right solution to help your business survive, there are other options you can look into, such as the following.

7(a) loans

7(a) loans are loans the SBA offers to small business owners. You may be able to qualify for one of these even if you're not in a declared disaster area. This might be the way to go if you need to borrow larger sums, or if you need money for reasons outside of what an EIDL allows. A traditional 7(a) loan lets you borrow anywhere from $500,001 to $5 million.

SBA Express Loans

An SBA Express Loan, a type of 7(a) loan, lets you borrow up to $500,000 as a revolving line of credit. This means you can borrow as much as you need up to your credit limit, pay it back, and borrow more again later if you need to. You can do this for up to 10 years, and then you’ll be in the repayment period and can’t borrow more. You may need to provide collateral if you plan to borrow more than $50,000.

Bank loans

Banks may be willing to offer your business a loan you can use to cover repairs or expand your business. If you don't think you qualify for an EIDL, checking with a few local banks might be your best option. Interest rates might be a little higher than what SBA loans charge, but if you have a good credit score, you may not notice a significant difference.

Rethink your business operations

If you have exhausted your financial resources or are waiting to hear back on a loan application, now may be the time to rethink your business operations. How can you get creative with generating revenue? You could try offering products and services virtually, providing gift card options, or creating a crowdfunding page. Amplify your efforts with your social media or email marketing to get your customer base to support your business.

When personal debt piles up

When your business is struggling, you may be tempted to rely on your personal credit cards to make ends meet. But this can be a slippery slope. You can probably find a lower interest rate through one of the options listed above.

If you've already taken on personal debt due to a disaster, you may want to consider exploring some debt relief options as well. 

Learn more:

• 5 Strategies to Help Manage Small Business Debt (Freedom Debt Relief)

• How to Ask Creditors for Loan and Credit Card Forbearance (Freedom Debt Relief)

• Debt Relief for Small Business Owners (Freedom Debt Relief)