The Small Business Administration (SBA) was tasked with helping struggling businesses with EIDLs loans.  These loans were are a great source of easy terms funding for those suffering the economic impact of the COVID-19 pandemic.

It is essential you read the detailed terms of your EIDL loan documents. Despite that the loans are not personally guaranteed, the contractual requirements are somewhat chilling.   Here are several issues you may want to review with your attorney.

  • No Change to the Business Ownership
    • Without SBA approval, borrowers may not sell the business or change its ownership structure.  This includes adding or removing a partner or shareholder.
  • Distributions Rules
    • The owners of the business may not make distributions outside the usual course of business without SBA approval. This includes loans, advances, bonuses, or asset transfers to owners, employees, or other companies.
    • Distributions to owners within the usual course of business may be permitted.  But the loan agreements are also unclear as to this issue.
  • Strict Collateral Requirements
    • Businesses that borrow more than $25,000 are required to pledge all their business’s personal property as collateral. Such collateral includes present and future inventory, equipment, deposit accounts, promissory notes, negotiable instruments, and receivables.
    • The SBA obtained a security interest in all such collateral at the time of the loan, as well as assets acquired during the loan term. The borrower must obtain hazard insurance for its collateral and ask the SBA for permission before selling or otherwise disposing of its collateral, other than selling inventory in the ordinary course of business.
  • Strict Record-Keeping Requirements
    • The SBA imposes strict record-keeping requirements on EIDL borrowers. They must keep itemized receipts showing how they spend the loan funds. A full set of financial statements are required to be furnished to the SBA each year. The SBA also has the option of requiring an expensive review of the borrower’s records by an independent CPA.
  • Buy American
    • EIDL borrowers must promise to buy American-made equipment and products with the loan proceeds, to the extent feasible.

Penalties for violations of the EIDL terms can be severe. Wrongfully applied proceeds may require immediate repayment. The SBA also reports defaults to credit reporting agencies.