EIDL loan - Use of Funds

[John Underwood]

Here is what my EIDL documents say and I would like to discuss some points here:

Borrower will not sell or transfer any collateral (except normal inventory turnover in the ordinary course of
business) described in the "Collateral" paragraph hereof without the prior written consent of SBA.

USE OF LOAN PROCEEDS
· Borrower will use all the proceeds of this Loan solely as working capital to alleviate economic injury caused by
disaster occurring in the month of January 31, 2020 and continuing thereafter ...
REQUIREMENTS FOR USE OF LOAN PROCEEDS AND RECEIPTS
· Borrower will obtain and itemize receipts (paid receipts, paid invoices or cancelled checks) and contracts for all Loan funds spent and retain these receipts for 3 years from the date of the final disbursement.


Borrower will not sell or transfer any collateral (except normal inventory turnover in the ordinary course of
business) described in the "Collateral" paragraph hereof without the prior written consent of SBA.



1. What do you use "Operating Capital" for? Do you use it for repairs and maintenance? Do you use Operating Capital to acquire more properties? What if your business model has been to grow your portfolio every year and you use Operating Capital to assist with this? Do you use Operating Capital to replace a leaking roof or Busted HVAC?  This may be a grey area but I don't think so. There is nothing in my documentation to say any of this is not allowed. Someone said that this is not allowed in another post and based on reading every word of my contract I would say that person is dead wrong. Any spending helps the local economy. That may be just as much of a reason that the SBA is making these loans.

There is the section about to  "alleviate economic injury" from January until... We don't know what the future holds for the economy and continued rent payments form Tenants.

So what if you take the loan and it turns out that nothing super bad happens that you have to "alleviate economic injury"? You just keep the money in a separate account and pay interest on it for 30 years?

Even if you say you are going to use the EIDL loan money pay mortgage payments on business properties, but ended up not having any real hardship are you still meeting this section of the contract? You could argue this either way.

Notice under receipts it says to keep contracts. Contracts are not used to buy paint at HD, contracts are used to purchase assets or maybe hire a PM. So why else would they mention to keep copies of contracts?

2. So if you flip houses (I have one under contract for sale), is a flip house not part of your normal inventory if you flip houses? This would be different than selling a rental house if all you normally do is rent houses as a Landlord. I think you could certainly make this argument. Even more so if you have other collateral in your business name. Would you still contact the SBA to get authorization?

3. The Collateral paragraph says: All tangible and intangible personal property, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security interest Borrower grants includes all accessions, attachments, accessories, parts, supplies and replacements for the Collateral, all products, proceeds and collections thereof and all records and data relating thereto.

So one could argue that a ladder or your printer that is company owned could not be sold or transferred without contacting the SBA for permission.

I think at the end of the day, as someone said on another post, that if you make you payments till the loan is paid in full you will likely never be audited. They are not going to have the manpower to do so.

Also use the money in good faith and not go buy a new car or boat with it.

Just like people getting in trouble for not using their self directed IRA correctly. These people who get in trouble didn't get in trouble for changing a light bulb at their IRA owned house, they were doing blatant violations like paying themselves to manage the IRA owned property or other stupid moves.

Just my opinion. Open for discussion. GO