Q&A #13 – What are the eligible expenses that EIDL funds can be used for?

Question: My organization has received a PPP loan, and we are thinking of applying for EIDL through the SBA to supplement our cash flow. However, we are not sure how we are permitted to spend EIDL funds considering that we have also received a PPP loan. What expenses are we allowed to use EIDL funds for?

Answer: There are some important restrictions on the permissible uses of Economic Injury Disaster Loan (EIDL) funds, especially for organizations that have received a PPP loan.

Generally, EIDL funds are for small businesses and nonprofit organizations that have suffered a “substantial economic injury as a direct result of a declared disaster,” 13 C.F.R. § 123.300, and may only be used to provide “working capital necessary to carry your concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury, but not to exceed that which the business could have provided had the injury not occurred.” 13 C.F.R. § 123.303.

In other words, EIDL funds are intended to help the borrower survive a disaster (such as the COVID-19 pandemic and shutdown) but cannot be used to pay for costs that the organization would not have otherwise been able to afford.

It is important to keep in mind that EIDL funds cannot be used for the same expenses that are being covered by your PPP loan. In fact, as set forth in the SBA’s most current SOP guidelines on the EIDL program, it is prohibited to use EIDL funds for costs that are compensated by any other sources, which can include other loans, insurance payouts, grants from the government or other nonprofit organizations, proceeds from litigation, and other sources.

This means you will need to carefully track the use of non-EIDL funds that are tied to specific costs (including but not limited to restricted grants, PPP and other loans for specified purposes, and reimbursement contracts) to make sure you are not “double-dipping” with EIDL funds. Many common sources of “unrestricted funds” such as donations for unspecified purposes and general operating support grants probably do not trigger these concerns, but even these funds will require a careful analysis.

Planning Tip – PPP funds will be applied first to cover eligible payroll, rent, utilities, and other permitted PPP expenses (maintaining the appropriate balance of 60% used for eligible payroll costs and 40% used for eligible non-payroll costs), but the PPP’s limitations present planning opportunities for organizations that also receive EIDL funds. You should run calculations to figure out which of these costs will fall outside of the parameters of the PPP and therefore may be able to be covered by EIDL funds, such as non-payroll costs that exceed the PPP’s 40% limitation, salaries in excess of $100,000 per year, and costs that will be incurred after the organization’s PPP funds run out.

There are also a number of other specifically prohibited uses of EIDL funds (set forth in the “Ineligible Uses of Loan Proceeds” section on page 75 of the SOP) that must be carefully adhered to, including:

1. Payment of any dividends or bonuses;

2. Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant;

3. Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal;

4. Expansion of facilities or acquisition of fixed assets;

5. Repair or replacement of physical damages;

6. Refinancing long term debt;

7. Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA);

8. Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations;

9. Payment of any penalty resulting from noncompliance with a law, regulation or order of a Federal, state, regional, or local agency;

10. Contractor malfeasance; and

11. Relocation.

As always, a key component of maximizing the benefit of EIDL and PPP loan funds is careful advance planning and contemporaneous documentation of transactions that will meet or exceed the requirements set forth in SBA guidelines.

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