Should I Apply for an EIDL Loan?

The Economic Injury Disaster Loan (EIDL) program reopened on June 15th once again providing access to a low interest loan. If you haven’t already applied, here are some questions to ask yourself if you’re considering it.

Do I need a loan?

Before taking on a loan, consider whether you’ve exhausted your alternative options. If you haven’t yet received a Paycheck Protection Program loan, it’s a good first option to explore, since you can have the entire PPP loan forgiven (unlike the EIDL which is not forgivable).

Also consider where your business currently stands in terms of cash flow. If you expect your revenue to pick back up soon, a loan might not be necessary. Take this opportunity to re-evaluate your projections and decide if you need funding for the foreseeable future.

If you need funding beyond the PPP, the EIDL is a no-brainer. The interest rates are incredibly low (3.75% for businesses, 2.75% for not-for-profits, the payback terms are long (15 to 30 years), and you don’t have to make your first payment for 12 months.

Keep in mind that an EIDL loan cannot be used to purchase capitalized assets (e.g. new equipment, a new vehicle, a new location) and should only be pursued if you’re looking to sustain day-to-day operations.

Can I afford a credit check?

The EIDL application will require a hard credit check as part of the process. If you are in a position where this could jeopardize your credit score, it’s worth considering whether the potential funds you could receive here is worth the impact at this time.

Should I apply to get just the advance grant?

As of July 13, the advance grant program was closed due to the $20 billion allocated to it being completely expended. You will no longer have the option to apply for the grant on your EIDL loan application.

Can I afford another loan on my balance sheet?

The interest rate of the EIDL is just 3.75% (2.75% for not-for-profits), but the term of the loan is 15-30 years which seems daunting to commit to a loan on your Balance Sheet for that long. However, the EIDL can be paid off early at no penalty or extra cost. This means you have the opportunity to select a loan amount that you’re comfortable with and confident you can pay off in a suitable time table. While you can’t request an amount greater than what was offered, you can accept any lower amount and choose when you want to pay it off completely.

Will it overlap with my PPP loan?

You can use a PPP and an EIDL loan at the same time. But there are two things to be aware of if you’re using both programs.

  1. The EIDL grant will reduce the forgiveness you are eligible for on your PPP loan. For example, if your PPP loan is $10,000 and you receive an EIDL grant of $1,000, you will only be eligible for forgiveness for $9,000 of your PPP loan.

  2. You can’t use the funds on the same expenses. If you have obtained a PPP loan and have not yet applied for forgiveness, you will not be able to use the EIDL funds for the following expense types:

  • Payroll

  • Rent/lease

  • Utilities

  • Interest portion of mortgage payments

Further reading: How the PPP, EIDL, and PUA Work Together

Do I have enough permissible expenses for an EIDL loan?

The EIDL can be used as working capital for your business which means it can be used on whatever you need to sustain your day-to-day operations. This means you have a lot of freedom in what you can use the loan for, however, there are a few expenses that you cannot use your EIDL funds on. An EIDL would not be a good fit if you were planning on using the funds on any of the following:

  • Dividends and bonuses

  • Disbursements to owners (draws and distributions), except when directly related to performance of services

  • Repayment of stockholder/principal loans

  • Expansion of facilities or acquisition of fixed assets (e.g. purchasing equipment such as a new camera)

  • Repair or replacement of physical damages

  • Refinancing long term debt (e.g. paying off previous large credit card debt)

  • Relocation

As mentioned above, you also cannot use your EIDL funds to cover any expenses you would be using your PPP loan on if you currently have a PPP loan. Be sure to consider your expenses that do not fall under the PPP’s eligible expenses if you have received a PPP loan.

Further reading: What Can I Spend My EIDL Loan On?

Am I comfortable providing collateral?

Collateral will only be required for loans greater than $25,000 with personal collateral being required for a loan amount greater than $200,000. If you’re not comfortable with providing business or personal collateral, you can opt to take a loan less than those amounts when you receive an offer. While you will be limited to a lesser loan amount, it also enables you to commit to a loan that works for you and your business.

Further reading: EIDL and Collateral: Your Questions Answered

How do I apply for an EIDL?

If you’ve decided that you would like to apply, you can get started on your application through the SBA’s Disaster Loan portal.

Further reading: How to Fill out Your SBA Disaster Loan Application

Other COVID-19 resources

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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