Wow!  Who knew that the SBA (Small Business Administration) could react quickly.  Those of us who watched its (in)action after Hurricane Sandy and Hurricane Harvey weren’t surprised to see just 900 EIDL’s (Economic Injury Disaster Loans) handled a day after the CARES Act was passed to help business cope with the pandemic.

But, now?  How about 10,000 applications each day?  That could really make the difference for a bunch of small (let’s hope they keep it to SMALL) businesses.

Now, that sounds appetizing, but we- that’s you and me- need to understand the rules that pertain to these EIDL’s.

First of all, the application, Form 1391 (SBA), is just five pages- but a potent five pages.  If we are going to ask for $ 25K or more (right now, these loans for small businesses are also limited to $ 150K), we must recognize that the SBA will effect a lien against every single one of our business’ assets. A formal lien- the SBA will file a UCC-1 (Uniform Commercial Code) which is filed in our state and our county/city.  (Note further- the SBA charges us $ 100 for the privilege of their filing that UCC.  It comes out of the loan proceeds.)   That lien includes intellectual property (read as patents and trade secrets).  So, should we default on the loan- we own nothing from that business.

It actually means more than that.  Many of us have working capital loans.  Those revolving credit lines often exist for decades- as long as we bring the balance to zero for at least a day or so each year.  Except, if all our assets are encumbered by the SBA, a bank will be (more than) reticent with that working capital loan renewal.  Since they have no assets to guarantee we will pay them back.

Still with me?   Good.

Because then we get to the next condition of the loan.  We have to have complete books, records, and financial statements that may be examined at any time by the SBA.   Now, I know, for our clients where we serve as CFO, that won’t be a big issue.  But, I know a bunch of our clients where we only provide advisory services- and their records are up to snuff about twice a year; once when we prepare their income taxes and the other time when the bank wants records to support that line of credit/working capital loan.

But, there’s more to this requirement than just maintaining proper records and statements.  The SBA arrogates the right to receive audited financials from our company as a condition of this loan.   Oh- and we- as the accountants of record- are precluded from preparing this audit.  And, of course, the fees for this audited set of records are completely at our expense.

If the SBA doesn’t demand audited financials, complete records must be filed with the SBA within 3 months of each financial year end for the duration of the loan.  (For most of you – and for us- that means 31 March.  Which means if we are a C Corporation, we need to have these records complete BEFORE we file our income taxes, which have a deadline of 15 April.)

As part of the process, the SBA is going to want to see financial records for the five years PRIOR to the loan date.  And, the requirement for financial records continues for three years AFTER the loan is fully paid.  (Yes, that’s what the SBA demands.)

We also have to have full and complete insurance on our business. (The hazard insurance must cover no less than 80% of the value of our assets.) That’s for the duration of the loan.  After all, those assets are now the virtual property of the SBA.

Since this is a working capital loan, the loan proceeds are encumbered with tons of proscribed activities and expenses.  (We can find these in SBA SOP 50 30 Revision 9.  The May 2018 update has 228 pages!)

And, while you should read every page, you don’t want to miss that list on pages 75 and 76, as found above. Those remind us the funds can’t be used for bonus or dividends, disbursements to stockholders/owners/offices/partners, repayment of other loans (not even refinancing other debt), business expansion or capital equipment, moving… OK.  You get the idea.  However, the loan CAN be used to pay off the IRS.  (Go figure!)

Which means if you owe the IRS a significant sum, this could be a pretty good idea (assuming you can get the loan).  Because it’s not of the prohibited uses.   You get to pay off the IRS with its penalties and interest with EIDL proceeds- and then repay the SBA over 30 years at a 3.75% interest rate.

A bargain if I ever saw one!  I’m still not sure the EIDL is the best vehicle for us.  But, I’m willing to be convinced it works for you-  as long as you pay attention to the caveats we’ll offer.