Using The Eidl As Funding During A Disaster
The Economic Disaster Loan program through the Small Business Administration may be available to your business if you are struggling during the pandemic (or during other times of disaster).
The loan is attractive because it is low interest, has a long repayment term, and is easier to get than traditional lender financing.
But, is it right for your business?
The EIDL is different than the Payroll Protection Program (PPP) loans in that it is not forgivable. It is a true loan program. Although the look sounds nice on the surface, there are several other terms and conditions you need to be aware of with the EIDL.
Here’s what you need to consider:
1: No Changes In Business Ownership
You must first get approval from the SBA if you want to sell your business, change ownership percentages, or bring in new owners.
If you know you will be selling your business within the near-term, or prior to the 30 year repayment period you should be prepared to seek approval from the SBA or pay the loan off early.
2: Distributions & Bonuses May Be Limited
This is a big one! If you normally take distributions “outside the normal course of business” you may want to rethink the EIDL.
The main term here is “outside the course of business”. This can be left for interpretation but I view this as tied to profits of the business. If your business is producing losses, you may want to hold off on distributions.
This also includes advances, bonuses, and cash transfers to related companies or owners.
3: Strict Record-keeping
You must keep an accounting of all the itemized receipts on how you spent the funds. I hope you are doing this in a normal course of business, so this should be no surprise or extra effort.
4: Restrictions On Spending
You may use loan funds for paying the necessary operating expenses of the business, including short term debt (credit card debt, etc.), accounts payable, payroll, and other ordinary expenses of the business.
You may NOT spend the funds on paying down long-term debt, making distributions to owners, expanding your business, or other fixed assets such as equipment. You also cannot use funds to cover expenses paid with PPP funds.
5: Collateral Requirements
Loans greater then $25,000 will require collateral. Assets of the business will secure the loan. This means you may not be able to sell the business property without paying off the loan. If your loan is over $200,000 you may also be required to sign a personal guarantee which makes you personally responsible for repaying the loan, even if the business closes.
6: Maintain Hazard Insurance
The EIDL loan agreement requires you to maintain hazard insurance based upon 80% of all insurable assets of the borrower. You must purchase this within 12 months of receiving funds.
7: Buy American
EIDL borrowers must promise to buy American made supplies and products with the loan proceeds, if feasible.
8: Penalties For Violations
Penalties for violating any of the EIDL loan agreement terms can be sever. The SBA can demand repayment of the entire loan immediately if found in violation of the terms.
Even stricter, if the SBA finds that you misuse funds, such as paying personal expenses or used for business expansion, you may be liable for one and a half times the original loan amount.
If you have additional questions regarding the EIDL, or other tax and accounting related matters, give us a call.
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