Economic Injury Disaster Loans, What you need to know.

Have you received an Economic Injury Disaster Loan (EIDL)?

If so, be sure you know what you're signing up for.

Many businesses have recently received Economic Injury Disaster Loan (EIDL) documents from the SBA. These loans can be a real lifeline for a business impacted by the current pandemic disaster. But, don’t just rush to sign the loan documents and receive the funds until you fully understand what you are signing up for.

Don’t misunderstand as you read this newsletter. We believe that an EIDL loan is a great opportunity and resource to help our business clients through these difficult times. But we want to be sure you accept an EIDL loan with your eyes wide open and know how to keep your business and personal assets safe.

With that, after your initial feeling of some relief from getting the loan documents and then the funds, here are some of the important issues you must know.

This is not at all like the Paycheck Protection Program. 

Unlike the Paycheck Protection Program, the EIDL must be repaid in full at an interest rate of 3.75%, and repaid over a period of up to 30 years. There is also no forgiveness on this loan.

The SBA gets a lien on all of your business assets.

If the loan is more than $25,000 the SBA will file a lien against all the assets of your business. This includes equipment, inventory, accounts receivable, goodwill, contracts, etc. This also means you cannot sell or trade-in any equipment without first getting the SBA’s permission.

Your business cannot take any other loans without first getting the SBA’s permission.

Now that the SBA has an interest in all of your business assets, you are also required to maintain adequate business insurance and to name the SBA as a loss payee. You will be required to provide proof of insurance.

Your accounting records must be kept in great order.

The funds can only be used for working capital. You cannot use the funds for business expansion, capital expenditures, etc. This means too, then, that the SBA can ask for itemized receipts and documentation for any of your expenditures at any time.

You’ll also be required to send the SBA your business financial statements and income tax returns every year until the loan is paid off. There is also a troubling statement in the documents stating that the SBA, at their sole discretion, may require you to send them “Reviewed” financial statements. Reviewed financial statements must be prepared by a CPA firm and include many disclosures and other schedules in addition to the standard financial statements. The cost for these varies considerably depending on many variables but can run a minimum of $2,000, to more than $20,000 annually. 

Why and when might they require reviewed financial statements? We honestly are not certain about that. The hope would be never.

You are limited in what you can do
until the loan is paid off.

First, you cannot use the funds to replace any debt incurred before this disaster. You can use the funds for working capital. This means the funds can only be used for expenses you’d normally pay out of your revenues that were affected by the pandemic.

You cannot (without getting the SBA’s okay) make any distribution of your business assets, or give any preferential treatment, make any advance, directly or indirectly, by way of loan, gift, bonus, or otherwise, to any owner or partner or any of your employees, or to any company directly or indirectly controlling or affiliated with or controlled by you, or any other company. In other words, the SBA is your new business partner.

You cannot be in or go in arrears on any child support obligations you may have.

There are more than a dozen other specifically stated things that would cause the loan to default, which would potentially give the SBA the right to call the loan or seize your assets.

Finally, be sure you understand you cannot ever get behind on your tax return filings or payments until the loan is fully paid. Otherwise, the loan will default and must be paid back immediately.

You are personally on-the-hook.

The final zinger to which you should pay attention is that you, the business owner, could be personally liable for the loan and put your personal assets at risk if you were to default on the loan if it was $200,000 or larger.

Now… take a deep, cleansing breath.

Now that we’ve gotten your stress level up, let us help bring it back down. The team at Scholl & Company, LLP has decades of experience working with the SBA and its lenders including helping to negotiate SBA loans that are in default. We can show you how to cost-effectively keep in compliance with your loan and work to help you plan the most productive use of the proceeds.  

Call us at (831) 758-5966 or email us at info@schollcpa.com with any questions or requests for assistance. We always offer a free, no-obligation initial consultation.