With the military on high alert, many small businesses will be affected as essential employees who serve in the uniformed services, as reservists or on active duty, leave for military service. The U.S. Small Business Administration's Military Reservist Economic Injury Disaster Loan Program (MREIDL) provides funds to eligible small businesses to meet operating expenses that cannot be met due to the military service of an essential employee.

Businesses categorized as suffering substantial economic injury due to the military deployment of an essential employee are those that are unable to meet financial obligations, and/or unable to pay ordinary and necessary operating expenses, and/or unable to market, produce or provide a service ordinarily marketed, produced or provided.

The filing period for small businesses to apply for economic injury loan assistance begins on the date the essential employee is ordered to active duty and ends on the date 90 days after the essential employee is discharged or released from active duty. The purpose of these loans is not to cover lost income or lost profits. Rather, the loans are intended only to provide the amount of working capital needed by a small business to pay its necessary obligations as they mature until operations return to normal after the essential employee is released from active military duty. MREIDL funds cannot be used to take the place of regular commercial debt, to refinance long-term debt or to expand the business.

Federal law requires the Small Business Administration (SBA) to determine whether credit in an amount needed to accomplish full recovery is available from non-government sources without creating an undue financial hardship on the applicant. Because MREIDL funds are taxpayer subsidized, applicants with the financial capacity to fund their own recovery are not eligible for MREIDL assistance. The Small Business Administration generally finds that 90% of disaster loan applicants do not have sufficient financial resources to recover without the assistance of the federal government.

Interest rates: Interest rates for MREIDL funds are determined by formulas set by the law and recalculated quarterly. The maximum interest rate for this program is currently 4%.

Collateral: Loans of $5,000 or less do not require collateral. Loans in excess of $5,000 require the pledging of collateral to the extent available, including a first or second lien on the business property. The SBA will not decline a loan for lack of collateral, but the business must pledge available collateral. Personal guarantees of the principals are also required.

Loan Terms: The law authorizes loan terms up to a maximum of 30 years. The term of each loan will be determined in accordance with the borrower's ability to repay.

Loan Amount Limits: The actual amount of each loan, up to a maximum of $1,500,000, is limited to the actual economic injury as calculated by SBA, not compensated by business interruption insurance or otherwise, and beyond the ability of the business and/or its owners to provide.

Insurance Requirements: SBA requires borrowers to obtain and maintain appropriate insurance. Borrowers of all secured loans (economic injury loans over $5,000) must purchase and maintain full hazard insurance for the life of the loan.

Small businesses affected by the military call-up of employees should immediately consider the business impact of any employee's departure for military service. The SBA defines an essential employee, whether or not he or she is the owner of the business, as an individual whose managerial or technical expertise is critical to the successful day-to-day operations of the small business. Additional information and a list of frequently asked questions regarding this loan program are available on the Small Business Administration's web site. If you have questions regarding the information contained in this alert, please contact Thomas E. Willett or the Harris Beach attorney with whom you usually work at (716) 232-4440 or (800) 685-1429.

This legal alert provides brief analysis or comments on matters of business law. This legal alert does not purport to be a substitute for advice of counsel on specific matters.