Does your business need working capital due to the terrible impact of the COVID-19 pandemic?
If yes, consider taking out a Small Business Administration (SBA) EIDL loan.
EIDL stands for the Economic Injury Disaster Loan program and it can provide up to $150,000 to businesses in need.
But be aware. Although the EIDL can provide you with much needed capital, it’s a loan that comes with a lot of drawbacks.
For starters, unlike a Payroll Protection Program (PPP) loan, an EIDL has to be paid back!
Plus, the “small print” EIDL rules you’ll have to follow are onerous indeed.
That’s why in this issue of the Tax Reduction Letter, we’ll spell out some of them and help you avoid nasty surprises.
If you’re thinking of taking out an EIDL, I urge you to avoid signing the loan document until you read new article titled Tax Tips: Seven Things to Know Before You Take Out an EIDL.
Check out these seven unpleasant facts you need to know now.
Fact #1: You can’t sell your business if you take out an EIDL loan. What’s more, you can’t merge, consolidate, or otherwise change your ownership or business structure. Ouch! For full details, read the full article.
Fact #2: You can’t make certain distributions without the SBA’s consent. This provision appears to prohibit, without SBA permission, any distributions or payments to the owners of businesses that have an EIDL. This includes payments of dividends to corporate shareholders or distributions to owners of LLCs or partnerships. For details, read the full article.
Fact #3: EIDLs come with many strict recordkeeping requirements. First, you must obtain and itemize receipts and contracts for loan funds spent and keep them for three years. The SBA can request your itemization and copies of receipts at any time. For full details, read the full article.
Fact #4: You may have to give other COVID-19 payments to the SBA. If you receive payment from any other sources to help defray your COVID-19-related losses, you are required to notify the SBA. If you receive such payments, you must give that money to the SBA, up to the outstanding balance of your loan. For details, read the full article.
Fact #5: You must preserve your collateral for loans over $25,000. If you take out an EIDL loan, the SBA gets a security interest in all tangible and intangible personal property your business has/acquires/creates in the future. Your collateral includes present and future inventory, equipment, deposit accounts, promissory notes, negotiable instruments, and receivables. For details on this, read the full article.
Fact #6: You must “buy American.” This seems reasonable but it can cripple your business if you depend on foreign goods or services. For full details, read the full article.
Fact #7: There are severe penalties for violations. Breach any of the terms of your loan agreement and you’ll be in default. Which means the SBA can demand immediate payment of all that you owe! The SBA also can sue you in court for what you owe and/or can collect against your collateral. Plus, the SBA will report your default to credit reporting agencies. For more, read the full article.