If you have been offered an Economic Injury Disaster Loan (EIDL), you might be wondering if you should accept it or not. Business owners receive offers along with paperwork that has them questioning whether they should accept the loan or not.
Here are five reasons you may be wondering whether or not you should accept an EIDL:
You Are Not Sure How You Can Use the Funds
These loans might be confusing because they do not come with specific instructions about how the proceeds might be used so it is confusing to many small business owners. EIDL are available to assist small business concerns in order to meet their financial obligations that cannot be met due to the direct result of the disaster. These loans are intended to assist through the disaster recovery period.
The following are ineligible uses of loan proceeds of an EIDL:
- Payment of any dividends or bonuses;
- Disbursement to owners, partners, officers, directors, or stockholders, expect when related to performance of services for the benefit of the applicant;
- Repayment of stockholder/principal loans
- Expansion or replacement of fixed assets
- Repair or replacement of physical damages
- Refinancing long term debt
- Paying down or paying off loans provided or owned by a federal agency
- And more
You Are Worried About Your Credit
Individual lenders report SBA loans (including 7(a) loans which the PPP program falls under) to credit bureaus, the SBA itself does not 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.
You Are Worried About Having to Repay a Loan
Many business owners are still facing uncertainty about the future of their businesses and reluctant to take on debt. There are some disadvantages for having an EIDL:
- Low interest rates
- Repayment periods of up to 30 years
- Payments deferred for twelve months
- No collateral for loans 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.
You Are Not Sure You Need the Loan
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. Some people see this as an opportunity to take advantage of low-cost funding even if it is not really needed.
You Wanted a Forgivable Loan
EIDL grants (advances) do not 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 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
Talk with your accountant if you are unsure how to use your EIDL funds. Consider using a portion of your disaster funding to pay for an accountant or CPA to review your current financials. You should also do cash flow forecasting month by month for about the next twelve to twenty-four months.
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.