EIDL - How You PROVE You Used Funds Correctly | Incite Tax

Hey, we've survived an initial push of crisis and we've, we did a lot of videos on PPP loans and the EIDL. And now we're transitioning to the second phase of those loans. How do you actually apply for forgiveness on the PPP loans? And in this case, The purpose of this video today is I wanted to talk about the use of the EIDL loan if you actually get it and accept the money. So first things first, here's what you are allowed to do with those loan funds should you take it. You are allowed to pay fixed debts, which would be something like rent. You are also allowed to use it for payroll. This also includes using the funds to pay yourself as the owner, as long as you're not increasing your wage. That's what they've kind of said so far. You're also allowed to use the funds for accounts payable, and they say any bills that you could have paid had the disaster not occurred, you can also use it for that. In the loan contract itself, it says the funds need to be used for working capital. What I just listed out— fixed debts, payroll, those things— that's really what working capital means. And so don't try to get fancy with what working capital means or doesn't mean. I kind of just laid it out for you so you don't have to worry about it. So that's what you're allowed to use the funds for. The SBA also specifically lists what you are not allowed to use the funds for. That list is a little bit longer. And it's not as exciting because if you were like me when you heard about these things, your mind first went to doing things like refinancing debt, which you'll see as I read this list is included in the things you're not allowed to use the money for. So you are not allowed to use, use the money for dividends or bonuses. You're also not allowed to use it for disbursements to yourself as the owner. Again, I covered if you have a W-2, That is allowed in the normal course of running your payroll, but any bonuses or other distributions you would like to give to yourself, that cannot come out of the loan funds. You also cannot use it for repayment of any shareholder debt. So if you put money into the company and on your books you're saying that the company owes that money to you at some point, you're not allowed to pay that off right now with the EIDL You're not allowed to use it for the expansion of facilities or to buy any new fixed assets. That's going to be things like a new rig in your gym, rowers, air bikes, anything that's an asset. You're not allowed to use the EIDL funds for that. You're not allowed to use the funds to repair any of your facilities. or replace like property damage stuff. You're also not allowed to use it to repay long-term debt. Now working capital would include paying off, like making a monthly payment on your loan because that's an ongoing operating expense. But any additional payments that are going to pay down that loan amount is not allowed. If your loan is with some other federal agency, Meaning you have another SBA loan or another loan from another federal agency. I don't get a lot of loans, I'm not even sure what those are. You're not allowed to use the funds at all in any form, shape, or fashion to send money that direction. And the last thing on their list is relocation. You cannot use the funds to relocate your business. If you do accept the loans, What you are opening yourself up to is that the SBA does now have the ability based on the loan contract to look at your finances whenever they want. Some people get uncomfortable with that idea. As long as you do things above board, it shouldn't be a problem. The funds are designed to help businesses during this crisis so they can survive and make it through it and then thrive on, on the back end. I think it's really important to note though, in this case, you really need to take a look at how was your business doing before COVID hit. I don't want any owners to get into a scenario where their gym was already struggling and now they're going to take this loan hoping they're going to get through this crisis, and then by the end they'll also then be out of that scenario where their gym wasn't profitable or Running the risk of having to close down because now you're going to have more of a debt. Like, the loan has to be paid back. It is an actual loan. The EIDL is not forgivable like the PPP loan. And so just be really careful about taking on debt. Be financially responsible with it. Yeah, just don't— I really don't want you guys to get any trouble with this loan as far as the uses go. No, that's not where I was going with that. I just want everyone to be financially responsible when it comes to taking on debt. I know that, I don't know if you remember like the toilet paper rush craze that many of us are still slightly confused about. The reality is, is these loans are almost the exact same thing as the toilet paper rush, especially back in March and April where People were just applying like crazy, not even knowing if they needed it. Needed it. You can't have that in there. So these loans are very similar to this toilet paper rush. I feel like a lot of people are trying to get the loans when they may not even necessarily need it, or where it may not necessarily be the best thought-out plan. I think the first thing that you should do before considering taking a loan is to actually look at your business plan. Maybe do a 13-week cash flow. We have a tool that you can get through our website that can help you plan out the cash flow for the next 13 weeks. Look at that first. Look at your business plan. Do you see a way out of this scenario where you are profitable? Because it will take profit to pay back the loan principal. Now that being said, one of the things that they talk about that is not allowed is paying down long-term debt. What it does not say is that you are not prohibited from paying down long-term debt during the period in which you have this EIDL loan. So I wanted to diagram for you some of my thoughts on this when it comes to how the cash is flowing, how How to use the EIDL in a way that's going to be congruent and approved by the SBA should they come looking at your finances. Because you will have to prove you used the EIDL money for their specific approved purposes and did not use it for any of the ineligible costs. So if you follow Profit First, you'll recognize this term. If you don't, buy my book. It's very good. This represents your operating expense account. This is the account you pay your bills with. All right, so now let's assume you got an EIDL loan. I am recommending you put that loan in a separate account. If you're already using Profit First, you may already have an account that you can temporarily use for this scenario. Like for myself, I would look at my team member expense account and start using that account while I use the funds as my EIDL account. So let me show you what that looks like. The EIDL is going to be funded by the SBA. Yeah? Okay, good. On the same page so far. So you have bills that get paid out of operating expenses. The SBA is going to fund your EIDL, which is going to go into this separate account that I am recommending you do. So far so good. EIDL funds haven't been touched. There's no possibility that you've used it for anything inappropriate that could get you in trouble, because for the record, if you do get in trouble, They can fine you up to like 1.5 times the loan amount, which is a lot. So if you took a $100,000 loan, they can fine you $150,000, which would be on top of the $100,000 that you already are gonna have to pay back, okay? So I'm gonna show you how to like, you know, keep things separate so that if they do look at your records, you've kept them in the right way. A common expense that You likely have, and if you're a gym owner, it's one of your top 2 expenses, is paying your payroll to your coaches. So let's assume in this example that that payroll bill is due and you need to send payroll off. This is how I would use my EIDL funds. Let's say this pay period the payroll is $10,000. Okay. Okay, what I can now do, I have my EIDL account. I'm gonna take $10,000 from my EIDL account, transfer it into my OPEX account, and then I'm gonna pay the payroll. See that? And then this then goes out to Your people. So now if the SBA came looking at my finances, they would clearly see the EIDL loan amount is now transferred into my OPEX account, $10,000. And then I immediately, likely on the same day, have a transaction that says $10,000 to payroll. Now, if you're using a payroll company, so that might be like, it shows up as ADP. Or maybe you're paying them directly and it'll have all your different individual employees on the bank statement. Regardless, you have a very solid paper trail with this scenario so that if they do ask, you can clearly show $10,000 paid for an approved amount. This is going to work for all those, whether it's rent, payroll, accounts payable, those items. That's— this is the method that I would recommend you use. So if it's not payroll, it's rent. Is rent $5,000? So it'd be $5,000 in, $5,000 immediately goes out. That's what I'm recommending. Now, if you follow Profit First, you know that we recommend you have a separate account for your deposits from members. We call that your income account. Yeah, income account. And our members pay money into the income account. Yay! So now it's sitting in the income account. Well, so the SBA, even if I've taken an EIDL loan, they cannot dictate to me how I use money that I get deposited from services I offer. So the money now that's sitting in my income account, I can use this however I want. In a normal course of business, if you're using the Profit First methodology— and if you're not, there's a great book about it, less than $25, could be a great investment— what you would be doing is transferring money from your income account into your OpEx account to then pay the bills. But right now, because you have the EIDL loan, I'm suggesting you have the separate EIDL account Goes into your OpEx, and that pays your bills. So you would have been taking money from this income account and transferring it up here for bills. You're not doing that right now because you're using the EIDL loans for the approved purposes, which means you now have money sitting in this account. What I am recommending you do, if you want to pay down long-term debt during the same period that you have an EIDL loan, I suggest paying those loan principals out of another account. And it— I don't care what account it is, as long as it's not one of these accounts. Definitely not one of these 2. Not one of those 2 at all. Don't do that. So I'll just call this loan pay account, and then loans get paid To lenders. Okay, so let's say I just paid payroll and it was $10,000, and I used my EIDL loan to do that following this example up here. Well, theoretically, I have $10,000 down here that maybe I didn't use then that's sitting there. Well, maybe I want to transfer $10,000 Into this account and then pay off a lender with the $10,000. So if the SBA comes looking at my paper trail, I will be able to prove that I, in the spirit of the law and the letter of the law, followed their rules. I used the EIDL money to pay off the approved expenses. And this is what they're looking at above this line that I'm going to draw for you right now. Above this line, this is the paper trail they're going to look at that's going to prove I used it for appropriate things. Yes, it so happens that during this time period I also paid down some loan principal, but I did it with my member deposits, which is not commingled In any form, shape, or fashion with the money trail up here. So they can't come back to me and say, hey, you used the loan funds for inappropriate purposes. So that's what I wanted to share with you today. If you are planning to do something like this, this is the recommendation that I would set up that follows their rules so you're not gonna get in trouble. Now, Obviously in real life most of us who are getting the EIDL loans have lost revenue, right? Hence the reason why they're trying to help us out of this economic disaster. So it's likely that if you had $10,000 of payroll, you're not gonna have $10,000 sitting here in your income account, and that's totally fine. I would use my EIDL account to fund as many operating expense accounts as I possibly can. During that time period, there might be a balance that gets accumulated into my income account. Then let's say I get to the point where I've used up all my funds in the EIDL amount. Now I'm safe to go back and, and start transferring money from my income account to my operating expense account. So I know many are planning on just using it in a way like, yeah, I'm going to use it now to get through as many expenses as we'll see We'll see if I ended up needing it all by the time we get back to going at full speed and we've recovered completely and life is back to normal type of scenario. But if you have some excess cash left over and you're wanting to use that to pay down debt, this is the recommended structure so that you don't get in trouble, so that you can clearly show, I didn't use the EIDL funds for anything other than working capital, and I only used other sources of income to pay down the lenders. So as always, we hope that you find financial resiliency. That only happens with profit, and profit is a choice.