“Tricia, should I apply for the Economic Injury Disaster Loan (EIDL)?”
That’s the question I’ve been asked repeatedly since the SBA re-opened the application portal for the EIDL Loan and Loan Advance in June 2020. My answer? It depends!
For many business owners, considering the EIDL loan was a no brainer. Their reasons included:
§ It’s a low interest loan at 3.75% or 2.75%.
§ Once approved you get access to cash flow right away.
§ It can be used for various business expenses compared to the PPP loan, according to some sources.
§ It doesn’t have to be repaid for 30 years.
For me, the decision was a bit more complex. I vacillated; applied in March; didn’t hear from the SBA until June; took the next two steps in the process and; ultimately did not accept the loan.
Here are some of the reasons why I chose NOT to take the EIDL loan that my fellow business owners should consider before accepting these funds:
#1. Lack of clarity about how to use the money.
The SBA says the EIDL are “working capital loans available to assist small business concerns, small agricultural cooperatives, small businesses engaged in aquaculture, or most PNPs of all sizes in order to meet their ordinary and necessary financial obligations that cannot be met as a direct result of the disaster.”
We can infer that the SBA’s phrase “to meet their ordinary and necessary financial obligations,” means that a working capital loan can be used for day-to-day expenses such as payroll, inventory, utilities and accounts payable.
But, if you are new to using an SBA loan, make sure to be crystal clear on how you can use it to avoid negative possible consequences due to misuse of funds.
#2. The loan starts accruing interest right away.
Historically, the EIDL worked like a line of credit where you could draw down on it whenever necessary. But not this time. The difference with the COVID-19 era EIDL and prior EIDL loan is that upon approval, the SBA deposits the lump sum in your bank account.
Once that happens, you are on the hook to repay it plus interest. Whether you use it or not, the cash starts costing you money immediately. So be sure to lay out exactly how you plan to use the funds and a reasonable timeline for repayment.
#3. Cash is cheaper.
Put simply, debt is expensive cash. If you have enough cash reserves or low cost funding to cover 6 or more months of operational expenses, ask yourself if you really need to take on more expensive cash.
3.75% is a relatively low rate, but if you are running lean, foresee real sales growth and have a good bit of cash to weather this economic downturn, think twice before applying for the loan.
The EIDL loan can be a viable option for your business. Here are some good points in support of taking the loan:
#1. When access to typical sources of capital is tight
For business owners that desperately need cash, this SBA loan seems to be more readily available to give funding in comparison with a bank or investors right now.
#2. Get more cash with a simple process.
Business owners can get more cash quicker through the EIDL loan program versus going through the process of applying for a grant.
#3. Building business credit
Relatively newer businesses and sole proprietors who may not have a business loan or line of credit can start building their business credit history with this SBA loan.
The EIDL loan provides short-term access to cash that can help a business survive. Business owners should be clear on their current financial situation, how they are re-positioning the business for the future and how the money will be used and tracked.
There are strong arguments on either side but ultimately — it’s your choice.
Speak with a financial expert about budgeting and planning for your business’s future and discuss whether or not an economic injury disaster loan is needed to fulfill the plan.