FINRA's BrokerCheck

Economic Injury Disaster Loan (EIDL) Considerations

To further meet the needs of U.S. small businesses and non-profits, the U.S. Small Business Administration this week reopened the Economic Injury Disaster Loan (EIDL) and EIDL Advance program portal to all eligible applicants experiencing economic impacts due to COVID-19.

Since EIDL assistance due to the pandemic first became available to small businesses located in every state and territory, the Small Business Administration (SBA) has worked to provide the greatest amount of emergency economic relief possible, according to the SBA’s website. To meet the unprecedented need, the SBA has made numerous improvements to the application and loan closing process, including deploying new technology and automated tools.

For the additional businesses that will apply for these funds, as well as those businesses that already applied and have begun receiving approval notifications, it’s important to understand how these loans and advances work, and what exactly saying yes to this financial relief entails.

Collateral

When accepting an EIDL of more than $25,000, businesses will need to pledge collateral – “all tangible and intangible property” – and, if asked, produce a reviewed financial statement.

Collateral includes:

  • Inventory
  • Equipment
  • Instruments, including promissory notes
  • Chattel paper, including tangible chattel paper and electronic chattel paper
  • Documents
  • Letter of credit rights
  • Accounts, including health-care insurance receivables and credit card receivables
  • Deposit accounts
  • Commercial tort claims
  • General intangibles, including payment intangibles and software
  • As-extracted collateral as such terms may from time to time be defined in the Uniform

Additional guidance from the Small Business Administration states:

  • Borrower will not sell or transfer any collateral (except normal inventory turnover in the ordinary course of business) described in the collateral paragraph without the prior written consent of SBA.
  • Borrower will neither seek nor accept future advances under any superior liens on the collateral securing this loan without the prior written consent of SBA.

These collateral conditions are more rigorous than businesses would, in most cases, face when getting a line of credit or bank loan, based on a loan of this size. Additionally, banks generally only require tax returns and perhaps internal financial documentation and not a reviewed financial statement done by an independent CPA.

Second-guessing the loan?

If you received an EIDL advance but are balking at the conditions required to take the loan, under current SBA guidance, we believe you can keep the advance and opt-out of borrowing additional money.

Important note: If you also have a Paycheck Protection Program (PPP) loan, your EIDL advance will count against your PPP loan forgiveness. For example, if you received a $1,000 EIDL advance, your PPP loan forgiveness decreases by $1,000.

If you already said yes...

Some borrowers may have already accepted the loans without appreciating the full measure of the SBA requirements. In that case, borrowers can immediately pay back the loan without incurring any fees or penalties. If you do pay the loan back without using it, we also believe it is unlikely the SBA will ask for a reviewed financial statement.

Approved EIDL uses and repayment

For businesses that need capital and do not have an issue with requirements, the repayment terms are favorable.

The SBA offers up to a 30-year term at a 3.75 percent interest rate for small businesses, and a 2.75 percent rate for nonprofits. The first payment is due 12 months from receiving the loan.

Additionally, while EIDLs between $25,000 and $200,000 are subject to the collateral requirements, they do not require a personal guarantee.

EIDL funds can be used for:

  • Fixed debts (rent, etc.)
  • Payroll
  • Accounts payable
  • Some bills that could have been paid had the disaster not occurred

EIDL funds cannot be used for:

  • Dividends and bonuses
  • Disbursements to owners, unless for performance of services
  • Repayment of stockholder/principal loans (with exceptions)
  • Expansion of facilities or acquisition of fixed assets
  • Repair or replacement of physical damages
  • Refinancing long-term debt
  • Paying down (including regular installment payments) or paying off loans provided, or owned by another federal agency (including SBA) or a small business investment company
  • Payment of any part of direct federal debt, (including SBA loans) except for IRS obligations
  • Relocation

Additionally, if you received a PPP loan, you cannot use EIDL funds for the same purposes until you exhaust your PPP loan. Remember, you can use PPP loans only for:

  • Payroll costs
  • Payments of interest on a mortgage obligation
  • Rent
  • Utilities

Additional resources

If you would like to discuss the information above, or any areas where Rehmann can assist, please reach out to your Rehmann advisor. You may also contact us at info@rehmann.com.

Rehmann is focused on providing practical guidance and insights to help empower organizations and individuals as we navigate through the uncertainty and complexity of this pandemic, together. Find resources and guidance at our COVID-19 Knowledge Center. Please click here to subscribe to our communications to ensure you remain up to date during these uncertain times.

Published in COVID-19

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