SBA EIDL Loan Has Strings Attached - Is it really worth it?

Question

I've been seeing a lot of people confused over these EIDL Loans including myself so I figured I'd start a discussion to help all of us make better informed decisions. Apologies if this is already been addressed somewhere else on the forums.

I've been offered an EIDL Loan and looking over the fine print, it seems like there's a lot of strings attached. If you've had a chance to look at the contract already, I wanted to get your opinions on how you interpret these terms and how you feel about them. Particularly, I'm wondering about the following.

1. My main concern is If I take on the loan, Do I have to seek permission from the SBA to sell or refinance one of our properties. I'm in the middle of flipping a house right now and I'm wondering if this would affect that or if I decided to sell one of my rental properties. I hate the idea of the government having a say in any of this.

2. What can we use the money for? Can we use it to pay our mortgage payments, capital expenses? If I already have money in the account to do that, am I okay to use my old reserves as active investing capital or for improvements and then keep the EIDL money as extra reserves and to pay the bills for the mortgages, utilities, etc?

3. If you've been approved for the EIDL Loan, did you decide to take it given the terms? Why or why not?

Daniel C. · Answer

@James Allen

I am far from a lawyer, but here is what I understand as I was approved as well.

1. You are correct. If over 25k and collateral is required, selling or refinancing any properties (or any personal property) needs to be approved by the SBA.

2. It clearly states that the funds need to be used for costs caused by the pandemic (and no expanding or refinancing debt). There is nothing I saw that said you have to use it first and can’t hold it in your account though, but proving that you need the loan based on losses from the pandemic could be more difficult if you are paying with other funds I imagine.

3. I was approved. I don’t think I plan to take it. If you don’t actually have/anticipate loses anymore, you may not want to either, although holding it as a wait and see is certainly a strategy.

Natalie Kolodij · Answer

Attorney Bryon Boyer has a great video on his facebook page that covers the terms of the EIDL

Brad Gibson · Answer

I just received notification that my EIDL loan has been approved, but I'm pretty spooked about taking the funds for a variety of different reasons.  The facebook video referenced above was super helpful, but I still have some questions and wonder how onerous the SBA will be with the terms of the loan.

I'm considering taking the funds and holding them in reserve in the event that things go really bad.  Those monies would serve as a big cash reserve in the event that loads of tenants are unable to pay their rent and I'm funding mortgages out of reserves and then personal savings.

Here are the major concerns:

1) If the loan exceeds $25,000 then they take a security interest in the all of the business's assets and the borrower pays the UCC filing fee.

2) Borrower cannot sell or dispose of the collateral without the permission of the SBA.

3) Must keep itemized receipts for all expenses paid for with EIDL funds & the funds cannot be double dipped with other government assistance programs.  Must hang onto all receipts for 3 years.

4) Must buy hazard insurance on all collateral within the business.  This isn't such a big deal since all rental properties and business equipment should be insured.

5) Must keep 5 years of rolling records for 3 years after the final repayment of the loan.

6) SBA reserves the right to inspect the business financial statements and require an audit of the statements by a CPA at the borrowers expense.

7) Provide the business's financial statements within 3 years after the close of the fiscal year.

It sounds like a great deal of record keeping, but if I simply hold the money in a separate checking account as a backstop and ideally not spend any of the dough, I could pay the loan back in a lump sum this time next year when times would hopefully be better.  I would owe 3.75% on the loan as interest, but it would certainly be some peace of mind to know there's a really big back stop and no foreclosures rental properties if times get brutal bad.

Mark S. · Answer

@Shefali Rai @James Allen

Guys,

Any updates on your end?

Mark S. · Answer

@James Allen

I am wondering the exact same things as you.  I just watched the video that @Natalie Kolodij mentioned and it was somewhat helpful but I’m still torn.

Great financial loan terms vs hefty ongoing documentation requirements and other concerns.

At this particular moment, as much as I’d love to borrow money at 3.75% fixed for 30 years with no payments for 12 months, I’m leaning towards not taking it for peace of mind (that the govt isn’t “all up in my biz,” literally).

Shefali Rai · Answer

@Natalie Kolodij thanks for suggesting the video - I checked it out and it was useful.

But RE focused questions remain. @Daniel C., @James Allen and others - do you now have more clarity on the security agreement of the EIDL terms? James, my questions are similar to your original ones in the thread above:

1. Collateral - for RE investors, assuming that the collateral definition includes the RE properties held in the LLC that applied for the loan?

2. Cannot lease RE property? - it says borrower will not lease collateral property (so RE property) without written consent from SBA. So would that mean new lease agreements need SBA approval?

3. Free and clear? - The certifications section says that borrower certifies that collateral is free of liens. So the question is what happens if there are already mortgages on the RE

Would be awesome if some RE lawyers on the platform could give their thoughts.

Daniel C. · Answer

@James Allen

I’m not a lawyer, but that’s my understanding. I don’t think it prevents you from all the documentation and filing requirements they are mandating though.

Definitely check out the Facebook video mentioned above, I did and it was very thorough.

James Allen · Answer

@Daniel C. What if I want to take less than 25k to avoid collateralizing the loan. Would I be able to sell properties or refinance as I please?

Daniel C. · Answer

There is a very thorough breakdown of the closing docs on YouTube if you search for sba eidl I was approved.

Ujwal Velagapudi · Answer

@James Allen I've got my $1k/employee a couple of weeks ago but have yet to get any additional terms or even any response from the SBA. It's been 6+ weeks, and just yesterday my credit was pulled. For the initial $1k/employee, or $10k loan advance if you were lucky enough to be one of the first in line, I don't think there are any strings attached and you don't need to pay it back. Could you share some of the general terms from the loan, I'd be curious to see what they have so I can see if it's worth it when I get the loan offer in the next couple of weeks. The loan cannot be used to refinance, pay off other debts, etc. directly but I don't think that means that you cannot refinance with your other business funds that you already have. I was wondering on that verbiage too, it was a bit confusing.

SBA EIDL Loan Has Strings Attached - Is it really worth it?

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