Small Business Administration (SBA) Economic Injury Disaster Loans (EIDLs) can be a great source of low-interest funding for businesses struggling with the economic impact of the COVID-19 pandemic.
Ernie Neve, CPA
September 29, 2020
Unlike Payroll Protection Program (PPP) loans, EIDLs are not forgivable—borrowers have to pay them back. But they have a low 3.75 percent interest rate and a long 30-year repayment period. Borrowers can repay them at any time without penalty.
To obtain an EIDL, borrowers must sign a loan authorization and agreement, a note, and a security agreement filled with fine print. Many of these provisions could have a significant impact on the borrower’s business for the life of the loan—up to 30 years.
It is vital to understand the terms and conditions before taking out any loan, including an EIDL. Here are seven key provisions borrowers should be aware of.
1. No Changes to the Business
Without SBA approval, EIDL borrowers may not sell the business or change its ownership structure. This includes removing or adding a business partner.
2. No Distributions Outside the Usual Course of Business
The owners may not make distributions outside the usual course of business without SBA approval. This includes loans, advances, bonuses, or asset transfers to owners, employees, or other companies.
Distributions within the usual course of business are permitted. SBA officials have said this includes distributions of net income to owners of a pass-through business, such as an S corporation or a limited liability company.
3. Strict Record-Keeping Requirements
The SBA imposes strict record-keeping requirements on EIDL borrowers. They must keep itemized receipts showing how they spend the loan funds. Also required is a full set of financial and operating statements, which must be furnished to the SBA each year. The SBA also has the option of requiring an expensive review of the borrower’s records by an independent CPA.
4. Using Other COVID-19 Payments to Pay the SBA
EIDLs are intended to cover disaster losses not compensated by other sources. If an EIDL borrower obtains grants, loans, insurance proceeds, or lawsuit recoveries to help defray COVID-19-related losses, the borrower is required to notify the SBA. The SBA may require that such money be used to repay the EIDL.
But a business may obtain both a PPP loan and an EIDL so long as it doesn’t use them for the same expenses.
5. Strict Collateral Requirements
Businesses that borrow more than $25,000 are required to pledge all their business’s personal property as collateral. Such collateral includes present and future inventory, equipment, deposit accounts, promissory notes, negotiable instruments, and receivables.
The SBA obtains a security interest in all such collateral the borrower has at the time of the loan, or collateral it acquires or creates in the future. The borrower must
· obtain hazard insurance for its collateral, and
· ask the SBA for permission before selling or otherwise disposing of its collateral, other than selling inventory in the ordinary course of business.
6. Buy American
EIDL borrowers must promise to buy American-made equipment and products with the loan proceeds, to the extent feasible.
7. Penalties for Violations
Penalties for violations of the EIDL terms can be severe. The SBA can demand immediate repayment of the entire loan if the borrower breaches any of its terms. The SBA also reports defaults to credit reporting agencies.
Borrowers who misapply EIDL funds—for example, using them to pay personal expenses—are liable to the SBA for an amount equal to one-and-a-half times the original loan.