Who would have thought that 2020 would bring about so many changes and challenges? Owning a business is already a difficult endeavor but when you add a global pandemic that causes a near-total shut down of the U.S. economy, well… let’s just say it’s not something that most of us would have volunteered for. Fortunately, the Small Business Administration has provided some assistance in the form of the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL). It has occurred to me that many financial experts have reported on the PPP ad nauseam, while the EIDL remains a bit unknown. Join me as I uncover some of the things business owners should know about the EIDL.
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Some of you might have heard of the EIDL before the CARES Act was signed. That’s because this isn’t a new loan. However, the CARES Act did put a little bit of a new twist on it. In its basic form, the EIDL is there to assist small businesses who have experienced a loss of income due to natural disasters.
With the COVID-19 pandemic causing the U.S. economy to be shut down, many small business owners were left reeling. As a result, the government came up with the CARES Act that included the PPP and an amended EIDL under the guidelines of the Small Business Administration. So what’s different about the EIDL?
Under the new legislation, the EIDL has been made available to small business owners AND qualifying agricultural businesses. In addition, the funds appropriated to the SBA for EIDLs have been increased and a provision was added that allowed for an emergency grant of up to $10,000 while business owners were awaiting loan approval. The SBA did cut off EIDL applications back in April of this year (2020) but has since resumed.
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Whenever I am looking at a loan, One of the first things I consider is when I can pay it off. Under the CARES Act, small business owners have twelve months before they must begin making primary and interest payments. That 12-month deferral timeline begins once you have received your funds. However, I haven’t been able to find any indication that there are early payoff penalties. So if you find yourself in a good financial position and decide to aggressively pay down your EIDL debt, you can do so without facing any financial penalty.
Another thing business owners should know about the EIDL is if you begin paying within the 12-month deferral period, all of your payments will be applied to interest only. At the end of the deferral period, payments will go towards primary AND interest. So waiting out the deferral date is something you probably want to consider when reviewing your repayment strategy.
Beyond that, the Economic Injury Disaster Loan has a 30-year term for up to $2 million at a fixed rate of 3.75% for small businesses and 2.75% for nonprofits. This makes the EIDL a very affordable loan for many small business owners. Now, before you run out the door to apply for a $2 million EIDL, you should know that there are some collateral requirements when you borrow more than $25,000. EIDLs above $25,000 require personal and business collateral, both tangible and intangible.
The types of collateral necessary depend on the amount of the loan. If you were to receive $250,000 or less, you are not required to personally guarantee the loan. Instead, your business guarantees the loan with various business collateral. However, above $250,000, the SBA is going to require personal collateral as well.
One of the most common questions that I receive about the EIDL is, “What can I use the money for?” As we know, the PPP requires that at least 60% be used for payroll and payroll expenses while the remaining 40% can be used on interest on mortgage payments, rent, and utilities. But what is the specific requirement for the EIDL? Basically, it needs to be used for working capital. What does that mean?
Essentially, the funds from an EIDL are intended to cover your basic operating costs. This can include payroll, rent/mortgage, and other business expenses. You might be thinking, “Well, Justin, that sounds an awful lot like the PPP loan.” and you’d be right. There is some overlap but the purpose of both of these loans is to keep your business running and to keep your employees employed. Basically, the EIDL was meant to cover any of the remaining costs of business that weren’t covered by your PPP funds.
Because the EIDL comes directly from the SBA it is considered government financial assistance and is subject to being audited. In addition, the SBA may require you to use a professional CPA during the audit. For this reason, business owners must be fastidious in their financial records. You will need to keep operating statements, P&L, and tax records for up to five years.
Proper record-keeping is vitally important to business owners for a variety of reasons but with everything taking place in today’s market, it is even more important. Not only can it benefit you to have this information readily available when seeking financing or even preparing to sell your business, but it can also act as an added layer of protection in situations like this, where you can be audited.
As far as limitations go, there are a couple of things that business owners should know about the EIDL. Well, you can’t use your EIDL funds for lobbying or to give yourself a bonus. For the majority of us, this is obvious but the SBA was very clear about these two things. The money really is just intended as working capital and to keep your business operating as close to normal as possible through an emergency situation.
If you received a PPP loan, ideally, you want to use all of those funds and have the full amount forgiven. So when you receive your EIDL funds, it’s a good idea to place that money into a separate account. This enables you to more easily document how the funds are being used. From there, you can transfer funds into your operating account as needed. Reserve this money for your operating expenses and save any profits that are realized. But why?
Well, simply put, we don’t know what to expect in the coming days, weeks, or months. We want to position ourselves to be able to weather any additional storms that may come from the pandemic. As we’ve seen recently, there have been spikes in confirmed cases around the country and it may require more time to fully open the economy. Even then, we don’t know how long it will take for people to feel fully confident in taking part in the newly opened economy.
On that note, many business owners are in better positions now than they were just a couple of months ago. If this is you, fantastic! It might be a good idea to hold off on paying down debts in the immediate future. Instead, keep yourself in a position to withstand any setbacks by saving as much cash as possible.
If you have any questions about creating a strategy for your EIDL funds, please contact us. The business experts at Financially Simple have helped hundreds of clients just like you!