5 EIDL Loan Terms and Requirements You Need to Know
The Economic Disaster Loan or EIDL is designed for businesses with less than 500 employees. Learn more about this loan, including qualifications and how to apply.
Although SBA disaster loans have been available for years, the EIDL was signed into law in March 2020 as part of the CARES Act, which was passed by Congress to provide emergency relief to workers. Americans and small businesses struggling to survive due to the impact of COVID-19 EIDL loans come with a low interest rate and a 30-year repayment term and can provide a lifeline to struggling small businesses[FEMININELesprêtsEIDLsontassortisd’unfaibletauxd’intérêtetd’uneduréederemboursementde30ansetpeuventoffrirunebouéedesauvetageauxpetitesentreprisesendifficulté
Currently, EIDL can cover up to six months of working capital or operating expenses, with a cap of $150,000, provided your business qualifies. With financing still available and a deadline of December 21, 2020 fast approaching, it might be time to learn a little more about the EIDL loan.
What is the difference between the EIDL grant and the loan?
When the EIDL loan was first offered, business owners had the option of applying for a loan advance that the SBA would consider a grant, provided all necessary criteria were met. But the funds that were set aside to cover the advance were quickly depleted, with the SBA halting the advances in July 2020.
Is your business eligible for an EIDL loan?
If you think an EIDL loan may be right for your business, your first step should be to make sure your business qualifies for a loan. The eligibility requirements are quite broad, so there is a good chance that your business will be eligible if it is designated as one of the following:
- A company
- An agricultural business
- An individual who operates as a sole proprietorship or as an independent contractor
- A small tribal business
- A private non-profit organization that is a non-governmental agency or entity
1. You must have less than 500 employees
The 500 employee maximum applies to all business types listed above. There are a few exceptions, such as a business with more than 500 employees that is considered small under SBA Size Standards.
2. Certain types of businesses are prohibited
The SBA prohibits you from getting an EIDL loan if your business is engaged in any of the following activities:
- Any illegal activity as defined by the federal government
- Any activity of a lustful sexual nature
- Deriving more than a third of its gross income from legal gambling activities
Other things that can prevent you from getting an EIDL loan are if a principal owner with a 50% or more stake in your business is more than 60 days behind on child support obligations. In addition, all state, local, and municipal government entities are prohibited from applying for an EIDL loan, as are all members of Congress.
5 EIDL loan requirements, terms and conditions you need to know
Before accepting a loan, make sure you know and correctly understand the terms and requirements of the EIDL loan.
1. Loans are for 30 years
All EIDL loans have a term of 30 years, with an interest rate of 3.75%. Loans are automatically suspended in the first year of the loan, with repayment beginning one year from receipt of the initial loan.
2. Loan amounts are capped
Although disaster loan assistance is available up to $2 million, the EIDL for COVID-19 has been capped at $150,000.
3. Collateral is required for loans over $25,000
If you get an EIDL loan over $25,000, you will need to pledge a business collateral to secure the loan. Collateral may include assets such as inventory and equipment as well as intangible assets such as trademarks and copyrights.
It is also important to understand that if you pledge collateral, you place many temporary restrictions on your business, including the stipulation that while your loan is still outstanding, you cannot sell, lease or transfer collateral. that was used as loan security without SBA approval.
4. EIDL loan recipients cannot change their business structure while the loan is outstanding
Your business structure must remain the same for the duration of the loan. For example, if you are looking to change your business structure from a sole proprietorship to an S corporation, you will first need SBA approval.
5. Loans cannot be used for physical improvements to your business
There are strict guidelines on what you can and cannot use EIDL loans for. And because the SBA requires you to keep receipts for all purchases made with EIDL loan money, you must track those purchases properly.
What you can spend EIDL funds on:
What you cannot spend EIDL funds on:
- Relocation costs
- Shareholder dividends
- Loan repayment, including federal loans
- Repairs or additions to facilities
- Refinancing of long-term debt
Whatever money you spend, remember to keep those receipts!
3 benefits of getting an EIDL loan
For small businesses impacted by COVID-19, an EIDL offers some distinct advantages that you should consider when deciding whether or not to pursue the loan.
1. Easy application
We all expect an overly complicated process when it comes to anything related to government programs. This is why applying for an EIDL loan is such a pleasant surprise. While the SBA says the application can be completed in about two hours, others said it took them about 45 minutes to an hour to complete.
And once you’re done, all you have to do is submit the application and wait for a response, which includes a loan quote. The loan quote represents the amount you can borrow, but you can change the amount when you electronically sign the application.
For example, if you are qualified to borrow up to $50,000, you can change that amount to the amount you wish to borrow, up to $50,000.
Once your application is completed, a loan officer will review the application, with an approval or denial usually sent within days of the application. Once approved, the money is usually transferred to your bank account, using the banking information you provided in the application. Funds are usually available within 5-10 business days of approval.
2. Low interest rate
The interest rate on an EIDL loan is 3.75% APR (fixed) with a 2.75% APR available for non-profit organizations.
3. Flexible and long-term repayment options
EIDL has a 30-year repayment plan, and there is no prepayment penalty if you decide to prepay. Also, the loan is deferred immediately, so you have one year before you have to start repaying the loan, although the SBA gives you the option to start paying it back immediately.
3 Disadvantages of Getting an EIDL Loan
An EIDL can help small business owners weather the COVID-19 storm. But before signing on the dotted line, you should be aware of some of the disadvantages of this loan.
1. He is not eligible to be forgiven
Unlike the PPP loan, cancellation of the EIDL loan is not an option. The only part of the loan that could be canceled was the advance, which is no longer available.
2. It’s restrictive
As mentioned earlier, there are many things you cannot spend EIDL funds on, including employee bonuses, moving expenses, or loan repayments.
3. Cannot be used for repairs
If someone has literally taken the drive-thru option from your restaurant, you can’t use an EIDL loan to repair the damage. Likewise, if your fryer breaks down or your roof leaks, you’ll have to rely on other funds to make those repairs.
Is an EIDL loan in your future?
If your business has been impacted by COVID-19, it may be worth applying for an EIDL loan. Although taking out a loan requires serious thought, an EIDL loan offers good repayment terms, a low interest rate and a simple application process. Like any loan, there are downsides to getting an EIDL loan, so it’s up to you to determine if the pros outweigh the cons.
If your financial projections look bleak, it might be worth considering applying for an EIDL loan before the December 21, 2020 deadline.