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The current coronavirus disease (COVID-19) outbreak COVID-19 pandemic may have significant economic implications for businesses and nonprofit organizations, including negative impacts on imports, global supply chains, and tourism. Furthermore, if COVID-19 becomes increasingly widespread or prolonged it may slow global growth, and some businesses may be forced to furlough or lay off workers. This Insight considers whether the Small Business Administration (SBA) could provide One potential form of assistance to small businesses is Small Business Administration (SBA) economic injury disaster loans (EIDLs) to eligible businesses and organizations that have suffered substantial loss as a result of COVID-19.
EIDLs provide eligibleeligible small businesses and nonprofit organizations up to $2 million to help meet financial obligations and operating expenses that could have been met had the disaster not occurred. Loan proceeds can only be used for working capital necessary to enable the business or organization to alleviate the specific economic injury and to resume normal operations. Interest rates for EIDLs are statutorily set at 4% per annum or less and can have maturities up to 30 years.
EIDLs are available only to businesses and private and nonprofit organizations that are located in a declared disaster area, have suffered substantial economic injury, are unable to obtain credit elsewhere, and are defined as small by SBA size regulations.
There are three disaster declarations that could make EIDL available:
Though it has never been tested for an infectious disease outbreak, on February 4, 2016, the SBA made EIDLs available to Genesee and adjacent counties in Michigan following a disaster declaration request from Michigan's governor related to public water contamination in Flint, MI. Given that precedent which the SBA referred to as a "historic health emergency," it could be argued that an EIDL declaration by the SBA Administrator would be the most likely type of trigger to provide EIDL assistance to businesses. However, an EIDL declaration for COVID-19 would (1) require a governor to certify that five or more business concerns are economically injured as a result of COVID-19, and (2) require the SBA Administrator to determine that COVID-19 meets the definition of a disaster under the Small Business Act.
EIDL declarations cover designated counties, but COVID-19 may be geographically diffuse. As a result, there may be instances in which a governor has five or more business economically affected by COVID-19 that are not in the same political subdivision.
It is unclear whether COVID-19 meets the Small Business Act's definition of a disaster. The definition states
the term "disaster" means a sudden event which causes severe damage including, but not limited to, floods, hurricanes, tornadoes, earthquakes, fires, explosions, volcanoes, windstorms, landslides or mudslides, tidal waves ..., riots, civil disorders or other catastrophes, except it does not include economic dislocations (15 U.S.C. 636 (b)).
13 C.F.R. §123.2 elaborates on the definition:
Disaster declarations are ... specific geographic areas ... damaged by floods and other acts of nature, riots, civil disorders, or industrial accidents such as oil spills. [They] are sudden events which cause severe physical damage, and do not include slower physical occurrences such as shoreline erosion.... However, for purposes of economic injury disaster loans only, they do include droughts and below average water levels in ... the United States that supports commerce by small businesses ... Past examples include ocean conditions causing significant displacement ... as well as contamination of food or other products for human consumption....
Strictly interpreted, COVID-19 may not be considered a "sudden event" and not tied to a "specific geographic area."
It should be noted, however, that EIDL has been provided for incidents that are not sudden such as droughts and, as just mentioned, the Flint water contamination incident (which arguably is also a public health incident). This may suggest to some that the definition of a disaster under the Small Business Act could be interpreted broadly to include an EIDL declaration.
On March 6, 2020, Congress signed into law P.L. 116-123. In addition to providing supplemental funding to several agencies, the act deemed the coronavirus disease (COVID-19) outbreak a declarable disaster under the Small Business Act. The amendment allows the Small Business Administrator to issue disaster declarations that make SBA EIDLs available to eligible small businesses. On March 16, 2020, the SBA Administrator began issuing declarations for SBA EIDLs in response to states seeking SBA disaster assistance for small businesses. SBA EIDL declarations are not automatic, they must be requested by a state governor. Historically, to be eligible SBA has required a state or territory to "provide documentation certifying that at least five small businesses have suffered substantial economic injury as a result of the disaster, with at least one business located in each declared county/parish." Under new criteria issued by the SBA, states/territories now "are only required to certify that at least five small businesses within the state/territory have suffered substantial economic injury, regardless of where the businesses are located." EIDLs may also be made available pursuant to a disaster declaration authorized by the SBA, based on a notification from the Secretary of Agriculture or the Secretary of Commerce, if a governor certifies that eligible small businesses have suffered substantial economic injury as a result of commercial fishery failures or fishery resource disasters. As mentioned earlier, major disaster declarations under the Stafford Act that provide IA and PA also trigger EIDL. Potential issues of interest associated with major disaster declarations are twofold: (1) the list of incidents in the definition ofSmall businesses in declared counties (and contiguous counties) apply directly to the SBA for EIDLs.
SBA Declaration Activity
; (2). Moreover, the thresholds used to determine whether to provide IA and PA are based on damages to homes and public infrastructure. It is unlikely COVID-19 would cause physical damages.
Emergency declarations under the Stafford Act do not have the definitional and threshold challenges posed byunclear how COVID-19 damages would be evaluated to determine whether a state warranted a major disaster declaration. Emergency declarations, however, do not authorize EIDL.
Though the thresholds for a physical disaster declarations under the Small Business Act are significantly lower than major disaster declarations (generally, at least 25 homes or businesses or a combination of the two have uninsured losses of 40% or more), as noted it is unlikely a COVID-19 incident would cause physical damages.
Given the existing statutory constraints, if Congress wishes to make EIDL assistance available to small businesses and nonprofit organizations affected by COVID-19, it may consider amending the Small Business Act to provide explicit statutory assistance following an infectious disease outbreak, or amending the Stafford Act to make EIDL assistance available under an emergency declaration.
It is important to note that the COVID19 emergency declarations issued on March 13, 2020, by the President, including the emergency declared under the Stafford Act, did not trigger SBA EIDLs.