There’s a bit of confusion regarding the Small Business Administration Economic Injury Disaster Loan (EIDL) and the Covid-19 EIDL. Let’s clear that up first:
During the Covid years, as part of the CARES Economic Aid Act, the SBA added a Covid-19 EIDL grant to the EIDL loans program. The SBA soon expanded the Covid-19 EIDL grant to include the targeted EIDL Advance and Covid-19 Shuttered Venue grants.
To further cloud the confusion between the EIDL loan and the Covid-19 Economic Injury Disaster grant, the Covid Paycheck Protection Program (PPP) loan, the targeted EIDL grant and the Covid-19 EIDL grant could be forgiven.
Also, although the EIDL program reopened at one point, the SBA stopped accepting applications for the Covid-19 EIDL program.
Forgiven? Unforgiven?
EIDL grants can be forgiven. EIDL loans, or any SBA Disaster Loan, can not be forgiven. However, Covid-19 EIDL loans from 2020-22 can have a payment deferment period up to 30 months from the day the loan was awarded.
Sadly, the Covid pandemic is not the only economic disaster that small business owners can face. Economic Injury Disaster Loans provide small businesses declared natural disaster assistance, after disasters such as floods, hurricanes and more recently train derailments which released hazardous materials.
Do you need to apply for EIDL funds? Do you have questions about the nuts and bolts of the EIDL program?
Here’s how the EIDL program works.
Understanding the EIDL Loan: Economic Injury Disaster Loan
What is an economic injury disaster loan? The EIDL program is designed to assist small businesses, sole proprietors and nonprofit organizations during times of natural disaster or economic injury.
To be eligible, the small business must be located within the declared (by an official entity, such as a state Governor or the US President) disaster zone.
Ironically, in order to qualify for EIDL loans, you must have previously declined loan applications. In other words, you tried to obtain credit from other sources and your current status is, not successful.
Once you’ve been turned down, and have the loan documents to prove that, you can apply for EIDL funds (SBA loans) via an EIDL application. Apply for an EIDL and streamline your EIDL small business loan application by applying online via an SBA approved lender.
EIDL Loan Facts for Small Business Owners
- One of the eligibility requirements is that the business must meet SBA small business size guidelines, with 500 or fewer employees.
- The second of the eligibility requirements is that the small business must be located in a declared disaster area. The SBA will facilitate a rapid portal for applications.
- The EIDL loan proceeds can be used for working capital and other business costs, such as operating expenses. The SBA has specific guidelines for what’s included in working capital.
- The maximum loan amount for the EIDL business loans is up to $2 million.
- The interest rate will be no more than 4%, much lower than most business loans.
- The repayment term may be up to 30 years.
- The EIDL funds can be used to pay existing fixed debt payments from existing business financing loans/long term debt. In other words, you can use the money you’ve borrowed at less than 4% to may payments on existing borrowers business loans/fixed debts. This can really help small businesses and nonprofit organizations grow.
- Your EIDL loan application must be made under your business name through a lender bank that’s approved by the SBA, using the required SBA form. You may be able to do an online application.
- The EIDL loan deadline will be set for each disaster. After that deadline the application portal will close, with the SBA no longer accepting EIDL applications from businesses.
Post-Approval: Key Steps for Small Business Owners
Once you hear from the SBA-approved bank loan officer that your loan status is approved, contact your financial advisor. The funds are from the federal government, and there are guidelines on how they can be spent and how EIDL loans affect your tax returns.
Reviewing and Understanding Your Loan Agreement
Once your SBA EIDL loan status is approved you should carefully review the paperwork and any relevant loan terminology.
Before you receive EIDL funds, make sure you understand all the terms and conditions, including the interest rate. You’ll have an eight week period before your first payment is due.
Personal Financial Statement: Keeping Track of Your Finances
Before you do anything with the EIDL funds, update your personal financial statement.
A personal financial statement is a document that lists all your assets, liabilities, and resulting net worth. It can be used by individuals and businesses to assess their financial position. It can be used by lender’s who request personal guarantees for business loans.
The statement typically includes a balance sheet section and an income flow section.
An individual’s net worth is determined by subtracting their liabilties from their assets. An EIDL loan – or any loan – is a liability that affects a person’s net worth.
Utilizing the EIDL Loan: Dos and Don’ts
DO
- Borrowers may use the money for working capital.
- Borrowers may use the money for additional approved uses, such as paying health care benefits, paying for rent/mortgage and utilities, accounts payable, or making payments on existing fixed debt.
DON’T
- Don’t use the EIDL funds to pay bonuses or dividends.
- Don’t use the funds for expansion of the business facilities.
- Don’t use the money for repair or replacement of physical damages to the facility. Funds for those uses should be a result of a claim to your commercial business insurance. This is one of the most common loan mistakes.
- Borrowers may not use the funds to relocate your business.
Long-term Strategies for Managing Your EIDL Loan
Small business owners should carefully weigh decisions regarding the best long-term strategies for managing the EIDL loan.
Repayment Strategies: Paying Off Your EIDL Loan
The EIDL loan term and the amount of the payment is calculated by the SBA. There is no penalty for early repayment of an SBA loan.
Is there a way for a small business owner to use the EIDL program to accomplish loan consolidation (pre-existing debt)? Can the small business owner ask for loan increases?
The best answer is that every situation is different. A strategy proposed by a small business owner will be more favorably reviewed after the owner establishes a record on timely EIDL loan payments.
Business Growth and Expansion: Using Your EIDL Loan Wisely
Since the EIDL loan has a very attractive percentage rate, using the money to pay down debt on a separate, existing, high-interest loan may make sense.
But, it could make more sense to use the EIDL loan to help businesses grow. Whether you’re a sole proprietor or a small business owner with several employers, contact your financial advisor or tax professional to discuss options.
Contingency Planning: Preparing for the Unexpected
Should businesses pay off their EIDL loan early? Or should they use available monies to fund a contingency plan?
Creating and funding a “rainy day” contingency plan is another way the EIDL loan money can help a business reach financial security and stability.
EIDL Loan Forgiveness?
An EIDL Loan must be paid. An SBA grant may be forgiven with proper documentation.
Tax Implications of the EIDL Loan
An EIDL Loan is treated the same as a traditional loan. Businesses can deduct the amount of interest paid.
Frequently Asked Questions (FAQs)
What are the interest rates and terms for an EIDL loan?
The term may be as long as 30 years and the interest rate will not be greater than 4%.
Can I use the EIDL loan to pay off existing debts?
Small businesses can use the EIDL to pay down existing business debt.
What happens if I can’t repay my EIDL loan on time?
If you can’t make a payment on time, notify your lender and the SBA immediately.
Are there any penalties for early repayment of the EIDL loan?
No. There is no penalty for early repayment of the EIDL loan.
How can I request additional funds or increase my EIDL loan amount?
If you’ve established a history of making on-time payments for a period of time, you can ask for an increase of the EIDL loan. Most likely, the increase will not be granted for an amount higher than the original loan.
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