Since the COVID-19 pandemic began, the SBA issued more than $630B to small businesses.
Unfortunately, many businesses still couldn't make it through the pandemic. So, what happens if your business took out an Economic Injury Disaster Loan (EIDL) but is now closing?
Here's what you need to know about getting out from under that SBA EIDL loan, in three straightforward steps.
Step 1: Understand what the EIDL was for
The purpose of an Economic Injury Disaster Loan (EIDL) from the Small Business Administration (SBA) is to meet financial obligations and operating expenses that would have been met had COVID-19 - not occurred.
Step 2: Identify how much was taken out for the loan
What happens to your business's SBA EIDL depends on the size of the loan and how your business spent the money received. In general, smaller loans have reduced consequences and lower personal risk than larger loans under the EIDL program. Assuming you kept receipts to show how the money was spent, here's how your business EIDL may be resolved, depending on the size of the loan.
If the SBA EIDL Loan was less than $25,000
If your business took out less than $25,000 in an SBA EIDL, it is good to know you and the business have negligible risk.
Smaller loans like this don't require collateral or a personal guarantee, which means there's not much the SBA can do if a business closes. The government may seize federally held assets like income tax refunds, but they will not be able to seize your personal funds or assets owned by the business.
If the SBA EIDL Loan was more than $25,000 but less than $200,000
At these levels, the SBA requires collateral from the business and will put a "blanket lien" on all company assets. If, or when, the business closes and defaults on the loan the SBA will move to seize business assets.
For example, if your business owns a building, heavy machinery, or vehicles, the government will seek to seize these assets to satisfy the outstanding debt.
If your business has few assets or receivables with which to pay the SBA debt, you need to diligently document the use of the money and expect the SBA to ask tough questions, review your business and personal bank records, and verify that the terms of the contract was followed.
If the SBA EIDL Loan was more than $200,000
If your business took an EIDL for more than $200,000, a personal guarantee was required. This means that if the business can't make payments, the business owner is financially responsible.
In addition to the blanket lien on the business and all business assets used as collateral, the SBA can seize many of the business owner's personal assets. If your business is closing, and it has took an EIDL greater than $200,000, the business owner's personal assets and finances are at extreme risk.
Before you file for bankruptcy, if your business took out an EIDL loan you should do the following:
1. Make sure you download your bank statements showing when you received your loan and how you spent it.
2. Have proof of payment for any large vendor payments.
If you are business owner and need to file bankruptcy, make sure you review your past use of your EIDL loan to ensure you don't have any issues during your case.
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