The Economic Injury Disaster Loan (EIDL) is a federal small business loan program made to support small businesses’ recovery from the economic downturn caused by the COVID-19 pandemic. It does this by providing accessible and borrower-friendly capital.
As of February 12, 2021, over $200 billion in Economic Injury Disaster Loans (EIDLs) were approved by the Small Business Administration (SBA). Despite this, still many people are confused as to how they should or should not use their EIDL loans since they received their letter of approval.
A lot of small business owners have never needed to use a government loan program before and so many have concerns about the consequences of misusing their EIDL funds.
The available guidance can be pretty unclear and difficult to understand, especially for independent contractors and those who are self-employed. These sorts of business owners may have very limited knowledge of terms like “working capital” and other jargon that is often used in small business accounting and financial statements.
Here, we aim to clear up some of the confusion around EIDL loans, including how you should and should not use them. We will take a look at some of the common queries small business owners have about these types of loans.
We will also explain how long you have to use the loan, what documentation you need and what to do if you decide to return it.
It is very important to consider that although we will provide you with information sourced from the SBA, we cannot speak on their behalf. If you have any questions about using your loan payment, you should contact your legal or financial advisor or your accountant. Do not use this article alone when considering how to spend your EIDL payments.
Can I Pay Myself?
The EIDL loan must only be used to pay for work you’ve done for your own company. According to the SOP, the EIDL must not be used to pay disbursements to stockholders, directors, partners, or owners except when directly related to the performance of services for the applicant’s benefit.
If you continue to work for your business, paying your own salary is an acceptable use of these funds. There are no restrictions on the type of work you do to earn your pay.
Can I Pay Off Debt?
The SBA announced on September 8, 2021, that it will now allow the use of EIDL funds to pay off any kind of business debt. There is also no prohibition against using it for credit card debt, as this debt is considered short-term.
The EIDL has an interest rate of 3.75%, which is relatively inexpensive compared to other types of small business loans, so it has been used by some to pay off or pay down other debts. This is acceptable as long as it is not being used to prepay certain federal debts.
Can I Buy A Vehicle Or A Home?
Buying property or a vehicle, even if it is a business purchase, is not allowed. The EIDL lists “acquisition of fixed assets” as one ineligible use of the loan, which usually would include vehicles. Even if the vehicle is regarded as a business expense, the purchase of a vehicle is normally classed as a fixed asset, and therefore would go against the SBA’s terms.
Can I Start A New Business?
This is also not an acceptable use of the EIDL loan. The loan is supposed to be used to maintain the operations of an existing business that has been affected by economic injury and therefore should not be used to start up a new business. This also includes the relocation of an existing business.
Can I Pay Rent Or Mortgages?
Paying rent or a mortgage on a commercial property is an acceptable use of these funds. This is because they are classed as fixed payments necessary to maintain the current status on long-term debts. Please note, that this is only for property regarded as a business expense.
How Long Do I Have To Use The Loan?
The SOP states that the EIDL loan can only be used until the resumption of normal operations. In the case of the COVID-19 pandemic, it is difficult to predict when this may be, depending on your location and your business. Once a business is no longer experiencing economic injury, the business owner should consider returning the funds.
What Documentation Do I Need?
The SBA or another government agency may need to review your spending in the future, so it would be wise to keep track of how you spend the EIDL proceeds. It is a good idea to note these expenditures as “EIDL” in your accounting program or spreadsheet and you should keep a file with all your receipts.
How Can I Return My EIDL Payments To The SBA?
To return your EIDL to the SBA, you can make a check payable to “SBA”, and include your 10-digit EIDL application number, along with the name of your business and your tax ID number. This can then be mailed to the SBA.
If we haven’t made it clear enough already, here is a list of what you can not use the EIDL for.
EIDL proceeds must not be used for:
Dividends or bonuses
Disbursements to stockholders, directors, partners or owners
Acquisition of fixed assets
Expansion of facilities
Repaying stockholder loans
Repairing physical damages
Paying off long-term debts
Paying any fines or penalties
Relocation of your business
Contractor malfeasance
Hopefully, we were able to clear up some of the confusion around EIDL and given you a clearer idea of how you can use your EIDL proceeds legitimately, and some things you should definitely avoid when it comes to spending your Economic Injury Disaster Loan.
If there are any other issues or things about this SPA loan you are unclear about, please consult your financial advisor or accountant, or call the SBA Disaster Assistance Customer Service line for more information. ,
