7 Things to Know Before You Take Out an EIDL Loan
SBA EIDLs can be a great source of low-interest funding for businesses struggling with the economic impact of the COVID-19 pandemic.
EIDL Loans are not forgivable—borrowers (that means you) have to pay them back. However, they have a low 3.75 percent interest rate and a long 30-year repayment period. (Yay!)
Borrowers can repay them at any time without penalty. This is a loan and does not reflect taxable income.
Here is some of the fine print to know about the loan itself:
- Borrowers must sign a loan authorization and agreement, a note, and a security agreement filled with fine print. Which means you as the business owner and are personally securing the loan.
7 key factors to the EIDL loan
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. without SBA approval.
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. This includes distributions of net income to owners such as an S corporation or a limited liability company.
3. Strict Record-Keeping Requirements
Keep records, meticulous records of how you send the loan funds. The SBA wants to know where its money is going. This is where having a reliable bookkeeper comes in handy (hint hint). Also, the SBA requires a full set of financial and operating statements, to be furnished yearly.
The SBA also has the option of requiring an expensive review of the borrower’s records by an independent CPA.
In other words, keep your receipts!
4. Using Other COVID-19 Payments to Pay the SBA
Since the EIDL loans are intended to cover disaster losses not compensated by other sources, if the 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.
A business may obtain both a PPP loan and an EIDL, as 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.
- This means all 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.
All the collateral used in securing the EIDL, including but not limited to, the list above, The borrower must:
- Obtain hazard insurance for its collateral, and
- Ask the SBA for permission before selling or otherwise disposing of its collateral. That is of course, other than selling inventory in the ordinary course of business.
6. Buy in the Good ol’ US of A
Made in th
e USA! EIDL borrowers must promise to buy American-made equipment and products with the loan proceeds, to the extent feasible.
7. Penalties for Violations
The SBA can dole out some serious penalties for violating the fine print. For instance, they can demand immediate repayment of the entire loan. As well as, report the defaulted loan to credit reporting agencies. Yikes!
Here’s the big one: Borrowers who misapply 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. (Ouch!)
If there are more updates, which there probably will be, we will keep you posted.
For more information, this article and many more to help your business grow on our website cdprofessionalservices.com