EIDL Loan Terms

Hi, I'm Donna Bordeaux, CPA with calculatedmoves.com I want to talk to you today about the Eidl loan. The economic impact Disaster loans are being spread throughout the country for business owners who have applied already. You can no longer put in new applications unless you're an agricultural type of a business. But many are now receiving notifications that the SBA has processed their loan and funding is becoming available. So when you receive those, you'll want to follow through. You should be getting an email from disastergovernmentassistancesba.com and that will be the link that you will use to secure a portal where you will finalize the details of those loans and see how much you're qualified for. First, the amount that you qualify for should be approximately six times the expenses of your business. In a normal month it should be covering six months of expenses. That loan is a 30 year loan at 3.75% interest with no payments for the first year. So after one year you would begin making those payments. The interest is still accruing during that 12 month period. I recommend that unless you have a crystal ball and understand what the future holds, you'll probably want to take the maximum amount of funding that will be provided to you. I recommend that you set those funds aside, think thoughtfully about what to do with them, if anything at all. Use them as your backup plan in case something goes wrong, in case something happens in the future, in the next 12, six months to make sure that your business is going to be okay through this crisis. Now let's take a look and dive a little deeper into the actual loan. There are many things in here that I believe everyone should know and I think many people are just clicking to sign documents. So let's look at the actual details that are inside that loan that you need to know about. All right, so first up, what can I use the money for? Now, these clips that I am taking in this document are specifically from the loan documents. Word for word. I've just cut and pasted these, so please be sure that you read your documents thoroughly to understand how this loan works. First, the use of the proceeds from this loan are to be used solely as working capital to alleviate economic injury caused by the disaster occurring in the month of January 31, 2020 and continuing thereafter. So keeping in mind that this is not a debt relief. This is not to be used to finance buying a building or to be used for taking care of some old debts that you may have had on the books that were long before January. Now, there's a lot that can be read into this statement and we could take it in a very simple format or we could take it in a very detailed format. We don't know. And my purpose in going through the details of this loan with you are to let you see where the gotchas are. These loan documents, I believe, have been in place for a long, long time and meant for a lot of other disasters that have occurred in the past. They don't want people to take that money that was from a disaster like a Hurricane Katrina or some other process and use that money in ways that are not what it was meant to be to help you get through a disaster. Our disaster right now from COVID is a very different challenge than most other disasters. So we can take these terms very loosely or very detailed and we don't know what approach the SBA will use. But if they are in a situation where they are backed up against the wall trying to get their money from you, my bet would be they're going for the gotchas. Okay? So be careful and understand what you're doing here. Next up, what can't you use the money for? There are some concerns in here. First, the limits on distribution of assets. The borrower will not make the without prior written consent of the sba, who knows how long that would take. Make any distribution of borrowers assets, which is cash or any other property, or give any preferential treatment. Make any advance, directly or indirectly by way of a loan, gift, bonus or otherwise to any owner, partner or any employee, or to any company that's related to the borrower, the borrower being your company. So this is a very, very broad based statement. Basically could say you can't pay yourself or take any money out of the business. Now I don't want you to go. Again, that's the most detailed way to look at it. There's probably some flexibility in there, but we don't really have any guidance to know what that is. Also, it also says that neither the borrower nor if the borrower is a business, anybody who owns more than 50% cannot be delinquent on any administrative order, court order or child support. So make sure that those are not going to be a problem if you're using this money. Alright? How do you document the use of this money for the SBA purposes? Again, these are very detailed requirements that I have a very difficult time believing that the SBA can ever do on a wide scale basis. However, if you are the lucky one who has chosen to be under audit of your loan proceeds this is what you need to know, what you have to have in hand. The borrower will obtain and itemized receipts for the last three years from the last disbursement of the loan. Now, these all occur in one payment, and you would have to submit those itemizations of what you used the money for and copies of all the receipts to the sba. The borrower will not use, directly or indirectly, any of the proceeds to relocate without prior permission of the sba. So if you have a location and you're looking to move it when your lease expires, or you're looking to take it to a remote location, technically you need to have permission of the SBA to make that move. The law prohibits the use of any portion of the proceeds for voluntary relocation from the business area in which the disaster occurred. Again, this is probably one of those leftovers provisions. They didn't want people to take money from the Hurricane Katrina disaster and use it to move to Texas or move to California. They wanted you to stay in that particular area and rebuild. To request the SBA's prior written permission to relocate, you have to present the reasons that you want to move and the address of the sites, whether it's voluntary or otherwise, whether any site other than that location is within the business area. So again, you've got some scrutiny you have to deal with. The SBA is now becoming your new business partner. All right, record keeping requirements. I'll skim this for you because it's very detailed, but please read this. For a lot of businesses in America, they do not have proper books and records that are occurring all throughout the year. Many are making summary information for tax returns, and those don't cut it for what the SBA would require. The SBA would require a set of double entry books, like we would do as accountants, each and every month, showing your financial statements and your operating statements. They might also want to look at insurance policies. There are provisions where you have to have insurance in this loan. The tax returns, records of any monies that are paid out to the owners compensation. So basically, you're under scrutiny. The SBA will also require or could audit your books on an annual basis. They want financial statements no later than three months following the end of the fiscal year. Many businesses that I'm aware of do not have financial statements. All of my clients do. However, that is the minority here. Upon written request of the sba, the borrower will accompany such statements with an accountant's review report prepared by an independent public accountant at the borrower's expense. So this probably would be a little more drastic case. If they feel like there are some improprieties, they may have you do a review, which is a high level, a very expensive level. It's one step below an audit which could run into the tens of thousands of dollars. For many businesses, the borrower authorizes all the taxing authorities, whether federal, state, or municipal, to furnish reports. So if you have a sales tax audit, for example, or a federal tax audit, or any kind of audit, the SBA could request those documents from that authority to make sure that they are being protected. Notifications. Again, we kind of talked a little bit about this, but you're required to notify the SBA throughout the entire 30 year term of this loan if you ever change your legal structure for whatever reason, your place of business, where you are at, or your name. So you must be thinking in terms of your other business partner, the sba, and making sure that you're updating them not less than 30 days before any of these things happen. So not after, but before. Okay. What happens if something goes wrong? What if they said you didn't do something properly? The reason that I'm diving into these rules so deeply, the gotchas, what happens if you did something wrong? You would be civilly liable, which is not criminal, but civil. So in court, for an amount equal to 1 1/2 times the original principal loan amount, plus repaying the loan, you could also come under other damages, other laws. They could, you know, if it was something to do with taxes, they could also turn that into the irs, cause a lot of issues and problems. So keep that in mind, making sure that you are acting in your best behavior for your new partner. The SBA collateral. Now, this loan, if it's less than $25,000, does not have any security interest, so there's no collateral. If less than $25,000, many of these loans go up to the maximum amount, which is $150,000. Anytime you exceed $25,000 for the loan amount. The SBA's collateral is everything the business owns. It's cash, it's receivables, its inventory, its equipment, anything that anybody owes it. All the deposit accounts, the SBA is your partner. They own all of it. So there are a lot of limitations. You have to be careful when you're using someone else's equipment. You can't sell your equipment, you can't sell your business. You can't do renegotiations of loans and things unless you have the permission of the SBA to do that. That Is again, in the technical sense. Now, in a realistic sense, if you called the SBA today and you said, hey, I thinking about changing the name of my business, well, they probably have some procedure, but I'm willing to bet it would probably take you several days or weeks to get to the root of who you would tell that to. So please make sure that you have a lot of advance notice if you're planning to make any changes in your business. Also, from the collateral sense, if you plan to go out of business or sell your business, be very careful here. If you are selling your business, you will need to pay off this loan before you can keep any of the proceeds of the business. So if you are selling your business for $100,000 and you owe the SBA $150,000, you're going to need to come up with $50,000 to be able to sell that business to pay off your note. Because you are selling all the collateral, that collateral has a lien filed on it. The UCC form that they took $100 of your proceeds for when you received your loan is used to file a public record amount of a lien that says, you can't just sell this business. It has someone else who is a potential owner. Okay? So be very careful thinking about that when you're moving forward, either accepting this loan or in your future business workings. All right, Couple other requirements about collateral. Again, I already jumped into this. You may not sell or transfer any collateral except normal inventory turnover without talking to your buddies at the SBA and receiving prior written consent. So not even just a phone call, but written consent. You can also not ask for more advances on this or any other movement of your collateral and other loans without getting consent of the SBA in written form. Now, this last piece here is a little bit of my own adding, the loan is guaranteed by the business. However, if you are a sole proprietor or a partnership, you technically don't have any layer of entity between you and the business. You are the business. So there's some question about whether you are personally liable for this loan. If you are a sole proprietor or partnership, there is no separation between those. If, if that is your case. Now, if you have an LLC that is a separate entity or an incorporated entity, where you are Inc. Or corp. You are separate from you personally, the business operates separate from you as a person. But in a sole proprietor who does not have that LLC protection, or Inc. Or partnership that does not have that entity protection, you may be held personally liable for this. All right, what causes default? Again, a Lot of gotchas in here. If you fail to comply with any provision, you don't follow the instructions. If you have any other SBA loan and you default on it, whether it's the same business or a different business. If you sell or transfer your business or any of the collateral or its proceeds. So technically, if we wanted to go for the gotcha, I think every single business who has an Eidl loan would be considered to be in default or could be because it's using its cash that is part of the collateral. If you do not disclose any material fact to the sba, if you miss something in your application, which it only asks for three or four things, so I'm not sure what they would ask you to do there. If you default on any loan or agreement with another creditor if the SBA believes it will materially affect your ability to pay this note. So if you default on your car if it's owned by the business, or default on a rental agreement with a landlord, that could have a provision that causes you to be in default. Here's a biggie. Fails to pay any taxes when due any taxes, sales tax, payroll tax, income tax, taxes you didn't even know existed. That could cause you to be in default if you become subject of a proceeding in bankruptcy or insolvency. Let's see, there's several other provisions here. If you reorganize, merge, consolidate, or otherwise make business changes without the consent of the SBA written. If you become the subject of a civil or criminal action that the SBA believes affects your ability to pay this note, you could be in default. Now, what happens if you're in default? The SBA will require immediate payment of the entire note. They can also have recourse to collect any amounts from the borrower. They could levy your checking account, file suit and obtain a judgment. Take possession of any collateral. They could take your cash. They could take your equipment, your inventory. They can sell any of that collateral with or without advertisement. When they sell it, that would reduce the amount of the loan, but they're not going to sell it for what it's worth. Okay, So a lot of really technical things that are included here that you need to know about. All right? If you have questions about this loan before you sign it or whether you've already signed it, I would be happy to help you work through those things. Just knowing, though, that in order for us to dive deeply into what your concerns are, we will probably have to have you under engagement and move into an area where we are assisting you and in an ongoing basis, which I would love to help you do and help you navigate these waters. If you have any questions at all, please don't hesitate to let me know. You can go to our website@calculatedmoves.com or email me at donnaalculatedmoves.com thank you very much.