EIDL Loan Restrictions for Small Businesses

How to Use the SBA EIDL Loan During a Disaster: 8 Key Restrictions to Know

The Economic Injury Disaster Loan (EIDL) program through the Small Business Administration (SBA) can provide critical funding during a crisis, such as a pandemic or natural disaster. With low interest rates, long repayment terms, and relatively accessible approval, it’s an attractive option for many small business owners.

But before accepting EIDL funds, it’s essential to understand the restrictions and requirements that come with the loan. Unlike PPP loans, the EIDL is not forgivable—it’s a true loan program with strict terms.

Here’s what you need to consider before using an EIDL loan for your business.

What Is the EIDL Loan and Is It Right for Your Business?

The EIDL loan is designed to help small businesses cover operating expenses during times of declared disaster. It can be used for working capital, payroll, accounts payable, and similar expenses. However, there are specific limitations you must follow.

If you’re thinking about using the EIDL loan, make sure you fully understand the terms before committing to the 30-year repayment.

8 EIDL Loan Restrictions You Should Know

1. SBA Approval Required for Ownership Changes

You cannot sell your business, change ownership percentages, or bring in new owners without SBA approval. If you anticipate selling your business or making structural changes in the near future, you must either get permission or plan to pay off the loan early

2. Distributions and Bonuses May Be Limited

Distributions taken outside the normal course of business may violate EIDL terms. If your business is operating at a loss, taking distributions or bonuses could raise red flags.

This restriction also includes:

• Owner draws or advances

• Bonuses to employees or owners

• Transfers to related entities

It’s important to evaluate whether your compensation practices align with SBA guidelines.

3. Strict Record-Keeping Is Required

The SBA requires detailed records of how loan funds are spent. You must maintain itemized receipts and documentation to show that funds were used only for approved business expenses.

If your accounting practices aren’t already up to standard, this will require extra effort.

4. Spending Restrictions Apply

EIDL funds can be used for:

• Operating expenses

• Short-term debt (such as credit cards)

• Payroll

• Rent and utilities

• Accounts payable

You cannot use EIDL funds for:

• Paying down long-term debt

• Distributions to owners

• Business expansion

• Purchasing equipment or fixed assets

• Any expenses already covered by PPP funds

5. Collateral May Be Required

Loans over $25,000 will require business assets as collateral. This means you may be unable to sell equipment or property without repaying the loan.

If your loan exceeds $200,000, a personal guarantee may also be required—making you personally liable for repayment, even if the business closes.

6. Maintain Hazard Insurance

Borrowers must maintain hazard insurance on at least 80% of all insurable assets. This coverage must be obtained within 12 months of receiving the loan and kept in place for the life of the loan.

7. Purchase American-Made Products When Possible

The SBA requires EIDL recipients to buy American-made products and supplies when feasible. While this rule may be flexible, it’s still part of the loan agreement and should be followed when practical.

8. Penalties for Misuse Can Be Severe

Violating EIDL terms can result in serious consequences. The SBA can demand immediate repayment of the full loan if you breach the agreement.

Even more severe: If funds are misused—for example, spent on personal expenses or unauthorized business activities—you could be liable for 1.5 times the original loan amount.

Get Expert Advice Before Accepting SBA Funds

At Aligned CPA, we help business owners understand their funding options and ensure compliance with SBA and IRS guidelines. If you’re considering an EIDL loan or want to review your current obligations, we can help you make an informed decision.

Contact us today to schedule a consultation.