Beware: That EIDL loan may come with unexpected strings attached
At the same time many businesses were applying for Payroll Protection Program loans, they also sought Economic Injury Disaster Loans (EIDLs), which initially promised to provide a $10,000 forgivable advance promptly.
But as the EIDL program rolled out, the Small Business Administration (SBA) soon changed the advance to $1,000 per employee or $1,000 for the self-employed.
Now, businesses are starting to get SBA notifications regarding how much money they can borrow in addition to the advance – and some would-be borrowers may want to reconsider taking the loan because of the accompanying conditions.
Specifically, businesses that assume larger loans need to pledge substantial collateral and, for all loans, may have to submit a reviewed financial statement. These are prepared by a CPA and can cost well into the thousands depending on the complexity.
As you read on, you will see why we recommend before accepting an EIDL loan, you consult with your accountant, banker, and attorney.
Two main conditions stand out when accepting an EIDL loan – the collateral businesses are required to pledge and the need, if asked, to produce a reviewed financial statement.
While borrowers with loans under $25,000 do not have to guarantee collateral, those accepting larger loans need to pledge “all tangible and intangible property’’ including:
- Instruments, including promissory notes
- Chattel paper, including tangible chattel paper and electronic chattel paper
- Letter of credit rights
- Accounts, including health-care insurance receivables and credit card receivables
- Deposit accounts
- Commercial tort claims
- General intangibles, including payment intangibles and software
- As-extracted collateral as such terms may from time to time be defined in the Uniform
The SBA warns this means:
- “Borrower will not sell or transfer any collateral (except normal inventory turnover in the ordinary course of business) described in the collateral paragraph without the prior written consent of SBA.’’
- “Borrower will neither seek nor accept future advances under any superior liens on the collateral securing this loan without the prior written consent of SBA.’’
These collateral conditions are more rigorous than businesses would, in most cases, face when getting a line of credit or bank loan, based on a loan of this size. Additionally, banks generally only require tax returns and perhaps internal financial documentation and not a reviewed financial statement done by an independent CPA.
Suppose I no longer want an EIDL loan because of the conditions?
If you received an EIDL advance but are balking at the conditions required to take the loan, under current SBA guidance, we believe you can keep the advance and opt-out of borrowing additional money.
- Note: If you also have a PPP loan, your EIDL advance will count against your PPP loan forgiveness. For example, if you received a $1,000 EIDL advance, your PPP loan forgiveness decreases by $1,000.
Some borrowers may have already accepted the loans without appreciating the full measure of the SBA requirements. In that case, borrowers can immediately pay back the loan without incurring any fees or penalties. If you do pay the loan back without using it, we also believe it is unlikely the SBA will ask for a reviewed financial statement.
Approved EIDL uses and repayment
For businesses that need capital and do not have an issue with requirements, the repayment terms are favorable.
The SBA offers up to a 30-year terms at a 3.75 percent interest rate for small businesses and a 2.75 percent rate for nonprofits. The first payment is due 12 months from receiving the loan.
Additionally, while EIDLs between $25,000 and $200,000 are subject to the collateral requirements, they do not require a personal guarantee.
As we did with PPP loans, we recommend keeping the EIDL money in a separate account, since the SBA requires you carefully document how the money is used and retain all receipts and contracts.
EIDL funds can be used for:
- Fixed debts (rent, etc.)
- Accounts payable
- Some bills that could have been paid had the disaster not occurred.
EIDL funds cannot be used for:
- Dividends and bonuses
- Disbursements to owners, unless for performance of services
- Repayment of stockholder/principal loans (with exceptions)
- Expansion of facilities or acquisition of fixed assets
- Repair or replacement of physical damages
- Refinancing long term debt
- Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company
- Payment of any part of direct Federal debt, (including SBA loans) except for IRS obligations
Additionally, if you received a PPP loan, you cannot use EIDL funds for the same purposes until you exhaust your PPP loan. Remember, you can use PPP loans only for:
- Payroll costs
- Payments of interest on a mortgage obligation
As you can see, using both EIDL loans and PPP loans correctly can be complicated and, when it comes to the EIDL program, the requirements are involved as well.
The Boyer & Ritter team is keeping track of the latest information and guidance. We are here to work with you and your company to help you get the full benefits provided by COVID-19 economic relief and any other changes made by federal or state governments during and after the pandemic.
Boyer & Ritter can help you navigate through compliance requirements of the loan forgiveness program, to help ensure maximum forgiveness is received, and provide a reliable and trusted source of information for your lender and the government. To learn more about engaging us for PPP Loan Forgiveness Support Services, and to help determine the level of support you may need, please contact us HERE.