EIDL: Should you take the loan???
Disclaimer: This blog was written based on my interpretation of the CARES Act and SBA guidelines issued to date. Further understanding will need to be done on your part to make any conclusions. Below are simply opinions and current information as I understand them and cannot be used as support of a loan application, financial debt decision or as tax support.
First of all, please excuse any typos.
This blog is to discuss what the EID-Loan is, what its used for and to help you decide if you want to move forward in the loan process. TO BE CLEAR, I am not discussing the EIDL advance $$ ($10k grant that is limited to $1k per employee) OR the PPP Loan.
UPDATED ON 6/24/2020 - Applications have opened back up for the loans and advance. Apply here.
TABLE OF CONTENTS
What is the EIDL?
In response to Covid-19 the CARES act allocated a significant amount of funds (somewhere around 60 billion - with a B) to the Economic Injury Disaster Loan (EIDL) program. This is not a new program, its been around for a long time and is intended for disasters - but the terms to qualify are significantly relaxed.
If you’d like to know more on who qualifies see my past blog here.
If you applied for the EIDL Grant ($10k limited to $1k per employee) then you applied for this loan
You will be notified via email to move forward with the loan process and accept it. You can accept the loan, request a reduced amount or do nothing and it will be considered denied.
Here is a quick summary on loan details:
Loans are up to $2MIL
The term is 30 years
Interest rates are 3.75% (2.75% for nonprofits)
The first month’s payments are deferred a full year from the date of the note
Backed and disbursed by the SBA
Is this loan forgivable?
No. It’s just a loan.
Is there collateral?
According to the recent loan documents I looked at, no collateral if under $25k. If over, it looks like some or all assets are held as collateral and permission is to be obtained from the SBA if you want to sell it. Yikes. Read your loan docs closely.
How are the funds to be used?
Per The CARES Act, they state the following:
Sick leave related to Covid-19
Payroll to retain employees
Meeting costs to obtain materials unavailable from the applicant’s original source due to interrupted supply chain
Making rent or mortgage payments
Repaying obligations that cannot be met due to revenue losses
To summarize, the intent of the loan is to cover operating costs during this disaster. It’s meant to keep your business alive, not replace your income that you lost due to the pandemic. Think: expenses that are still occurring while you are not able to produce income. Rent, software fees, contractors, etc.
How is the loan secured?
For loans $25k and under, there is no security interest in any collateral. This means that you can have the loan and nothing will be accessible to the SBA if you default on the loan.
For loans over $25k the SBA takes a general security interest in any and all “collateral” as defined in the promissory note. For the following items, you cannot sell, lease, license or transfer without the SBA’s consent. The exception is for inventory used in the ordinary course of business.
inventory,
equipment,
instruments, including promissory notes,
chattel paper, including tangible chattel paper and electronic chattel paper,
documents,
letter of credit rights,
accounts, including health-care insurance receivables and credit card receivables,
deposit accounts,
commercial tort claims,
general intangibles, including payment intangibles and software and
as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code.
This means, if you plan on selling assets anytime soon you may need to include legal fees to obtain approval from the SBA.
The devil is in the details
Always read the fine print. I know we accept terms and conditions all the time without reading them, this is not one of those situations!! Read those thoroughly.
FAQs on Spending:
What am I NOT allowed to spend it on?
Refinancing
Making loan payments on other federal debts
To repair physical damages
To pay IRS tax penalties
To pay out dividends
Expansion of your business
Do I need to spend it in a limited time period like the PPP?
No, you can take it and use as needed for operating expenses.
Does the grant money I received affect this loan?
No. Based on the language in the CARES Act, the grant is yours to keep and doesn’t increase or decrease your ultimate EIDL loan amount. NOTE: This is not the case with the PPP loan, EIDL grant money reduces the forgivable amount of the PPP loan.
Do I need to prove what my loan money was spent on?
There is no “forgiveness” process like the PPP loan, so there isn’t a back-end way of checking. However, it is considered fraudulent if you do not spend funds on allowable purposes.
Can we have both the PPP and the EIDL?
Yes but there are some rules. You cannot spend these funds for the same purpose. So if the PPP loan was spent on payroll and rent, you cannot use the EIDL on the same payroll and rent. They haven’t issued any more guidance on this yet.
I feel that its relatively clear that you can’t pay your employees with the EIDL during the period your supposed to be using the PPP funds. Use the EIDL on operating costs during the covered 8 week PPP period - after the period, I don’t see anything stating you can’t use EIDL funds for payroll going forward.
Is this loan taxable?
No, its just a loan you have to pay back.
I’m a sole proprietor, can I use the funds to “pay myself”?
Based on everything I’m reading, I do not believe so. It’s clearly meant to continue business operating expenses. The payroll piece to it is for employees you must pay to keep business operations going, not yourself.
Can we pay of business credit cards with this money?
Based on their allowance of “repaying obligations” I would believe so. HOWEVER - this could fall into the category of “refinancing debt” which is NOT allowed. Ugh. We need more guidance on this. More to come.
Can I pay personal credit cards with this money?
Generally no, because its not business - but I do have a small “maybe” to add. Many sole proprietors put their business expenses on their personal cards because that is allowed. Based on current language, to the extent that the card balance relates to business expenses - I think that may be an appropriate usage of funds. However, I’m not certain unfortunately.
Okay then, SHOULD I take this loan?
That depends.
First off, if you have a balance on your business credit card because of Covid19 - HANDS DOWN TAKE THE LOAN. No one needs to be paying that high interest rate! CC debt will take over your life.
For all other cases, here are my personal thoughts on this…
I don’t like debt. However! This is an exception. We are in a completely unknown territory with our current economic situation. We have so many open questions right now. No one knows how long this will last, when the economy will recover and what revenue will be like for you.
Loans like this don’t come around often or ever for businesses. The interest rate is super low, no payments for 1 year and the term is for 30 years!!! It is an unheard of opportunity. What I don’t want to happen to you, is for you to decline the loan and then end up needing it.
In the end, you could always just take the loan and pay it right back once things return “normal” for you. There is no prepayment penalty and the interest rate is crazy low.
Hypothetically if you have a $25k loan, you take it and leave in savings in case you need it. You end up not needing it and pay it back in a year before payments start. You will have accrued $937 in interest (which is still a write off btw). It is a small price to pay to have a rainy day fund for 12 months!
Think of the stress reducing factors of having that as a safety net in case anything else happens or if we continue in the state we are in right now. Don’t put your whole business (and I’m assuming personal life) on the line because of minimal interest…due in tiny payments. Less stress means better decisions, productivity, energy, mindset, etc. for business overall too.
This is ultimately a personal decision, but don’t the negative word of “debt” get in the way. You need to take care of you business, and worst case scenario you just didn’t need it and you pay it right back with tiny interest.
But hey, you do you.
How much time do I have to decide?
60 days from the loan offer based on what I’ve reviewed.
Recording and tracking the loan.
How to record in your books
It’s simply a loan so what happens is the funds will come into your account, and a loan will be created on your balance sheet as a new account.
Accountant terms: Debit Cash Account; Credit SBA Loan
As you use the funds, you will record expenses as usual. Cash goes out, expense is recorded.
When you start making payments on the loan you will reduce the loan balance and record interest with the cash payments just like any other loan.
Accountant terms: Debit Loan, Debit Interest, Credit Cash
Tracking everything for the SBA
Based on the loan document it states that you need to obtain and itemize receipts (paid receipts, paid invoices or cancelled checks) and contracts for all loan funds spent. These must be kept for 3 years in case of audit or reapplying for more funds.
Tip: Keep all your accounting files/records as usual, but also create a separate scanned file on your computer of all things you specifically spent the EIDL on.
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