Shortly after the World Health Organization (WHO) declared the novel coronavirus a worldwide pandemic, governors across the United States ordered the closure of millions of businesses to help slow its spread. This hit small businesses, especially those in the retail, bar and restaurant, personal services, and hospitality industries, extremely hard from a financial perspective. Recognizing this, Congress scrambled to put together several business relief programs in the forms of loans and grants. One such program is Economic Injury Disaster Loans (EIDL), which we describe in more detail below.
EIDL Part of Small Business Administration Disaster Loans Program
The Small Business Administration (SBA) operates a general disaster loan program for business owners who have suffered significant economic losses due to a natural disaster, terrorist attack, public health emergency, or other situation outside of their control. The funds allow private sector businesses not in the farming industry to rebuild or repair their company. It is the only type of SBA disaster loan not limited to small businesses.
With the EIDL program, business owners can receive up to $2 million dollars to rebuild after a declared disaster. This is true regardless of whether the loan applicant’s business sustained physical damage due to the disaster or not. The actual amount of loan proceeds depends on the degree of economic injury as determined by the SBA.
An EIDL doesn’t replace lost revenue or sales the business missed out on during the disaster. Its purpose is to provide economic relief from the fallout of the disaster while allowing you to rebuild your working capital. Applicants typically have 30 years to repay the loan in full although the SBA sets the terms based on their ability to pay back the loan.
Don’t Overlook the Fine Print
Business owners desperate for financial relief during the coronavirus pandemic may rush to apply for an EIDL without fully understanding what they are getting themselves into. At Doerhoff & Associates CPA, we want to ensure that our clients understand all options before taking on a loan they might have for the next 30 years. Although the WHO declared the pandemic less than three months ago, we have already received feedback from other clients about potential issues they wish they understood better before signing the legally binding paperwork.
Limits on Distribution of Assets
Borrowers must receive authorization from the SBA before completing numerous actions in relation to their loan. These include:
- Distribute any personal or business assets.
- Give any type of preferential treatment.
- Make a direct or indirect advance, including via payment of a bonus or gift or making loans available to any employees or business partners.
- The advance limitations also apply to any company that the borrower directly or indirectly controls or has any type of affiliation.
If the SBA approves you for an EIDL and you accept it, you must receive prior written authorization from the organization before completing any of these actions. That means you need to understand and agree that you would need approval from the SBA any time you take money out of your business for up to 30 years. With the sheer number of loans approved, you can expect it to take some time to receive written authorization from the SBA. This may also require you to submit documentation to support your request.
Unfortunately, failing to follow these rules could put your EIDL in immediate default. Our only goal in sharing this information is to ensure that our clients feel comfortable with EIDL terms before accepting funds from the SBA.
Contact Us to Learn More About Loan and Grant Options
We understand that you hear conflicting information about the pandemic and financial recovery options for business owners every day. That’s why we encourage you to schedule an appointment with us to gain a better understanding of your options before moving forward.