5 reasons you may want to reconsider an EIDL Loan

On December 22, 2020 Congress passed the stimulus bill which includes new EIDL grants, new Paycheck Protection Program loans and other small business relief. Read more about that legislation and apply for a new PPP loan here.

“Should I accept my EIDL loan?” That question was recently posed to me by a friend who received an email from the SBA stating she was approved for an Economic Injury Disaster Loan (EIDL). She is not alone in her question. After weeks (or months) waiting for an approval from the Small Business Administration, business owners are now receiving offers along with paperwork that has them questioning whether or not they should accept the loan. 

Here are five reasons you may be wondering whether or not you should accept an EIDL:

1. You aren’t sure how you can use the funds

This business owner who posted in the Business Loan Insight Financing Hub – PPP, EIDL and More on Facebook is confused about how funds may be used:

I NEED it, am still hopeful I get it, but all the “chatter” even has me second guessing. Can I use it for rent, for payroll, for utilities, for credit card bills (used when buying inventory), or are we “handcuffed” with how to use these funds?

These loans don’t come with specific instructions about how the proceeds may be used so it is confusing to many small business owners. 
EIDLs are described this way in the Standard Operating Procedures (SOP 50 30 9)  for Disaster Loans:

Economic Injury Disaster Loans (EIDL): Working capital loans are available to assist small business concerns … in order to meet their ordinary and necessary financial obligations that cannot be met as a direct result of the disaster. These loans are intended to assist through the disaster recovery period.

Many business owners aren’t sure what “working capital” means, however, and the SBA SOP doesn’t spell out acceptable uses in the SOP. It is clear about how you can’t use these funds, though: 

Ineligible Uses of Loan Proceeds: EIDL proceeds may not be used for: 

1. Payment of any dividends or bonuses; 

2. Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant; 

3. Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal; 

4. Expansion of facilities or acquisition of fixed assets; 

5. Repair or replacement of physical damages; 

6. Refinancing long term debt (see below); 

7. 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 licensed under the Small Business Investment Act. Federal Deposit Insurance Corporation (FDIC) is not considered a Federal agency for this purpose; 

8. Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations. (Additional requirements regarding the payment of federal debt start on page 75 of the SOP.)

9. Pay any penalty resulting from noncompliance with a law, regulation or order of a Federal, state, regional, or local agency. 

10. Contractor malfeasance; and 

11. Relocation

Note that when it comes to item #6 in that list, “long-term debt” means debt with a repayment period of more than one year, according to Generally Accepted Accounting Principles (GAAP),” explains Steve Burke, Western Washington Regional Manager with the Washington Small Business Development Center.

Some business owners are also confused about whether they can use funds to pay themselves. According to the Wisconsin SBDC, “Owners can apply for EIDL and PPP and consider their own draw as a ‘payroll expense’ as long as they can provide documentation of that person’s draw.” Indeed, the SOP (page 186) lists “owner’s draw/salary when the draw is both normal and essential” under “normal obligations, which the business would not be able to meet throughout the remainder of the injury period.” 

EIDLs may also be used for “extraordinary items” which are defined as “needs outside of normal operations and directly caused by the disaster.” The SOP states:

Extraordinary items can include: 

(1) Temporary rent or storage fees, additional advertising costs, etc.; 

(2) Accelerated debt due to the disaster; 

(3) Inventory replacement may be an extraordinary item. For example, in the spring, a clothing store located in a disaster area is left with an inventory of winter clothing and has no funds to order summer stock. The cost of ordering summer inventory represents an additional need.

Note, these are examples of some of the acceptable uses of these funds, but not a comprehensive list. 

Remember there is no double-dipping if you get an EIDL and a Paycheck Protection Program (PPP) loan. In other words, you can’t use funds from both programs for the same purposes. And paying yourself with an EIDL may impact your ability to receive Pandemic Unemployment during the same time period. 

Read: 5 Ways You Can and Can’t Use Your EIDL Loan

Merchant Cash Advance (MCA): What is it and How to Use It 

2. You are worried about your credit

Over the weekend, I received an email from a business owner who wanted to know:

I have been approved for an SBA (EIDL) in the amount of $15,000. Does this debt get reported on my credit? I already have mortgage debt, etc and I am concerned about adding new debt on top of that with this loan.

Individual lenders report SBA loans (including 7(a) loans which the PPP program falls under) to credit bureaus, the SBA itself doesn’t report to credit reporting agencies. Since these loans are made by the SBA, EIDLs should not appear on personal or business credit reports. However, for loans of $25000 or more, the SBA files a UCC-1 filing which can appear on business credit reports and may impact your ability to get other financing. 

3. You’re worried about having to repay a loan

Many business owners are still facing massive uncertainty about the future of their businesses and are reluctant to take on debt. In a discussion about EIDLs in the Facebook group mentioned earlier, one business owner commented:

I added a 150k loan to my books on a test run. Wow. not good. Backed those out of my Peachtree (accounting software) super fast!

As far as loans goes, EIDLs do have a few advantages: 

• Low interest rates (3.75% or 2.75% for nonprofits)
• Repayment periods of up to 30 years
• Payments deferred for twelve months
• No collateral for loans of less than $25,000
• No personal guarantees for loans of less than $200,000

However, these are loans with stipulations and limitations on how you use the funds. Keep in mind, a default may affect your ability to get other federally guaranteed loans in the future. 

4. You aren’t sure you need the loan

One Facebook commenter was blunt in their assessment of the debate around whether to accept an EIDL, stating that if you don’t really need the loan, don’t accept it:

After all the cursing I’ve done over the inefficiencies of the SBA and government in general, I was wrong the whole time. The problem is the people who are abusing the entire system and trying to scam or otherwise misuse the funds and what they are truly meant for.

Many applicants are genuinely confused and worried about the future of their businesses. In the rush to respond to the COVID crisis they applied for every program possible, and are now trying to decide how to move forward. 

But there are also those who see this as an opportunity to take advantage of low-cost funding even if they don’t really need it. A report by the Inspector General reviewing previous disaster loans found that “SBA issued EIDLs and non-EIDLs to businesses that did not suffer an economic loss or to businesses outside the timeframe of the disaster.” 

5. You wanted a forgivable loan

One commenter on the Nav blog article, Frequently Asked Questions about EIDLs, wrote:

I received from the SBA an email approval for the EIDL loan at 3.75% interest. Is the EIDL loan forgivable? I have not received anything (info/money) regarding the EID grant? Is the EIDL and EIDG different? What can I do now if I want the EIDG and not the EIDL?

EIDL grants (advances) don’t have to be repaid. By contrast, Economic Injury Disaster Loans are not forgivable and must be repaid. 

Some borrowers applied for EIDL because they wanted the grant of up to $10,000. (The grant is being administered at $1000 per employee). The application for both go through the same portal at SBA.gov. 

If you receive the grant, the funds typically just show up in your bank account and the deposit includes the notation “EIDG” for EIDL grant. Just because you receive the grant doesn’t mean you have to accept the loan. 

The loan, by contrast, will require you to accept and agree to the loan terms from the SBA before funds are approved and disbursed. 

How to make an EIDL work for you

If you are unsure how to use your EIDL funds, talk with your accountant. You can also connect with your local Small Business Development Center or SCORE chapter which offer a variety of free services to small business owners. Many are providing free education and assistance to businesses impacted by COVID-19. SCORE mentors are also providing free online mentoring on its website, SCORE.org. 

Here are two of the best tips we’ve heard when it comes to using EIDLs the right way:

1. “Consider using a portion of your disaster funding to pay for an accountant or CPA to review your current financials, if you haven’t done so in the past. Catching issues on the front end will save headache and heartache on the back end,” advises Mickie Lewis-Gemici, Regional Director of the SE Colorado Small Business Development Center. 
2. “Business owners should do vigorous cash-flow forecasting month by month for the next twelve to twenty-four months” recommends Burke. 

EIDLs can help businesses stay afloat during the pandemic. But they also require the business owner to get crystal clear on the businesses finances, so they can decide if these loans work for them in the long run.