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Posts on this page reflect tax law change alerts & updates for new provisions passed by Congress that may impact you.  We also periodically post reminders & updates that may impact our clients.  While we try to be as detailed as possible, we ask that clients contact their BenderCPA advisor with any questions before taking action based on a post to ensure your intended outcome is achieved.

EIDL Borrowers Beware: Loan Restrictions Could Cause Disaster If Not Addressed

Posted by Admin Posted on Aug 12 2020

Congress established SBA’s Economic Injury Disaster Loan (“EIDL”) program as an early financial relief for businesses impacted by the COVID pandemic.  While the initial $10,000 advance had few requirements to obtain, businesses who went on to get the actual loan needed to certify that the loan was required and agree to only spend the funds on certain categories of expenses.

Beyond those original certifications, however, the EIDL loan documents also included a laundry list of other activities that cannot occur while the EIDL is outstanding.  Since many of the EIDL loans have a 30‑year term, some of these restrictions may be burdensome for business owners once the impact of the pandemic has subsided. 

Forbes recently released an article (Link: outlining potential pitfalls that EIDL borrowers may not even be aware of.  While we recommend EIDL borrowers read the full article, the conclusion was that many borrowers may potentially be in violation of both civil and criminal statutes, in addition to their loan documents, due to the following:

1.       Their business did not face a “Substantial Injury” as required by the law when they applied for the loan originally.  This is a much higher threshold than the “uncertainty” required for the PPP loan.

2.       They spent the money on prohibited business expenses including purchasing fixed assets, some repairs, refinancing or paying-down existing debts beyond normal payments, any penalty, or relocation costs.

3.       They made prohibited owner distributions, including dividends, owner draw, personal expenses for owners, or paid down owner loans.  Borrowers with EIDLs are 100% prohibited from making ANY owner distributions while the loan is in place.

While careful direct tracing of EIDL funds is possible to avoid some of these issues, many borrowers may not be as diligent with the EIDL funds as they should be.  Especially if EIDL funds were not placed in a separate bank account, there is a risk that the SBA could contest tracing of a borrower’s use of the loan from co-mingled EIDL and operating funds.

We recommend that any clients with EIDL loans re-visit their initial certifications and document the “Substantial Injury” that qualified them for the loan.  In addition, clients should keep a detailed log of how EIDL funds were spent (with supporting documentation).  BenderCPA advisors are available to help with tracing documentation, if requested.

Borrowers who have concerns about whether they meet the requirements for the EIDL should pay back their loan as soon as possible to mitigate their risk if their loan is reviewed.  Paying the loan back early will also release the business from the burdensome restrictions of the EIDL going forward.  Borrowers should consult their attorney as to the potential legal ramifications of violating the EIDL requirements in their specific circumstances.

In summary, while the EIDL program provided much needed cash-flow for some businesses impacted by the pandemic, the restrictions it places on borrowers make it a less attractive long-term relief option.  We recommend borrowers take a close look at their situation and consider paying-off the EIDL as soon as possible to avoid its risks and restrictions.

This information is provided as a convenience to our clients and is based on existing authorities as of each post.  Our advice could change as a result of changes in the applicable laws and regulations.  We are under no obligation to update posts if such changes occur.  Any information contained herein is general in nature.  You should contact your tax advisor to confirm how this information applies to your specific situation.  This advice is not intended or written to be used for the purpose of avoiding penalties that may be imposed.