You might be one of the 10,000 businesses per day being offered your final EIDL terms. We want you to remember that you are not required to take out the loan simply because you were approved. The power of choice is still yours.
Rest assured the [up to] $10,000 loan advance you received after your application is still yours, either way with no repayment expected. That should have no bearing on your next moves. However, if you do have economic need and have interest, you can then apply for a loan for up to $150,000.
Here are some other practical considerations before you sign your EIDL:
Do you need an EIDL?
You might first need to look at what it can be used for. The SBA site says,
“These loans can provide vital economic support to help alleviate temporary loss of revenue. EIDL assistance can be used to cover payroll and inventory, pay debt or fund other expenses.”
Furthermore, a recent SBA informational webinar provided a list of ineligible uses of loan proceeds on slide 7. The list includes:
- 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 a direct Federal debt (including SBA loans) except IRS obligations.
If you owe back taxes to the IRS, especially if it is a relatively recent tax liability, then you should consider using your EIDL funds for this. IRS debts are the only non-debatable long-term liability that is allowed to be paid with an EIDL.
As for other long-term debt, there could be gray area. When it comes to refinancing current debt, we can see how the lack of guidance could be interpreted the other way as well:
For example – My business is materially impacted by COVID-19. I am unsure how long this impact will last. I will utilize the EILD to lower my monthly payments/obligations by paying off an existing higher cost loan. In this way, the EIDL provided “vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.” In this case, we recommend checking with a SBA approved banker before making any decisions.
Are the terms favorable or are there better lending options available to you?
- The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%.
- Terms can stretch out to 30 years.
- There are no prepayment penalties.
- Collateral may be required.
What reporting is required?
There will be annual reporting requirements as well as financials needed for your approval. A reviewed financial statement may be required, but not at the onset of the loan. Internal financial statements are required at the onset, and the SBA may require a third-party review if their financial situation deteriorates.
Most importantly, remember that you are not obligated until you sign the loan documents – so even after you review the loan agreements and are not comfortable with the terms, you can opt out of the loan at that time.
If you have questions about EIDL, contact our experts today!