Editorial · July 6, 2020
EIDL Loan Terms: What to Check Before You Sign
EIDL loan terms are the rules that decide what a Small Business Administration disaster loan costs you and when you pay it back. Read them before you sign. This guide covers the four points that matter most: the rate, the length, the first payment and the personal risk.
What the SBA says the loan looks like
On June 17, 2020, the SBA reopened its Economic Injury Disaster Loan portal to all eligible small businesses and nonprofits hurt by COVID-19. It listed the main terms in that notice. The rate is 3.75 percent for small businesses and 2.75 percent for nonprofits. The term can run up to 30 years. The first payment is deferred for one year.
Those are the headline numbers. They are good ones, but they are not the whole offer. Your own loan papers set your exact figures, so treat the notice as a map and the papers as the ground.
The rate and the length
The SBA's disaster loan page says the rate on these loans will not exceed 4 percent a year. It also says the term will not exceed 30 years. It adds that the repayment term is set by your ability to repay. So 30 years is a ceiling, not a promise.
Check your offer for three things. First, the rate. Is it the 3.75 percent the SBA announced for businesses? Second, the number of years you were actually given. Third, the monthly payment. Do the math yourself with a loan calculator.
Here is one example. A $50,000 loan at 3.75 percent over 30 years costs about $232 a month. Over the full term that is about $33,400 in interest, before any interest that may build during the first year. A shorter term raises the payment but cuts the total interest. Ask which choice your offer allows.
The first payment
The SBA says the first payment is deferred for one year. That gives a business time to restart. It is also easy to misread. A deferral is a pause in payments, not a pause in the loan.
Ask your loan officer one clear question: does interest keep adding up during that year? Then ask what your first payment will be when the year ends. Write down the answers and the date of the call. A business that plans for the first payment on day one has fewer surprises on day 365.
Your personal risk
Federal law changed some rules for these loans. Section 1110 of the CARES Act, signed on March 27, 2020, told the SBA to waive its rules on a personal guarantee for advances and loans of not more than $200,000. A personal guarantee is a promise by the owner to pay with personal assets if the business cannot.
Do not stop at the law. Read what your own papers say about guarantees and about what the business pledges. Look for the words collateral, security and guarantee. If you cannot tell what you are pledging, ask in writing before you sign.
One more point: the SBA's general EIDL page says help goes to small businesses that cannot get credit elsewhere, but section 1110 of the CARES Act told the SBA to waive that credit-elsewhere test for these COVID-19 loans. Either way, be honest on the application. Anything you state there is part of the record.
The advance is not the loan
The June 17 notice also describes the EIDL Advance. It is up to $10,000, or $1,000 per employee. It does not have to be repaid. A business can get it even if the loan is not approved, and you can ask for it as part of the loan application. The CARES Act sets the same $10,000 limit.
Keep the two apart in your records. The advance is not a loan, so it has no rate and no repayment. The loan has all of the terms above. If your offer bundles them in one email, label each amount in your own notes.
A short checklist before you sign
- The rate on the offer matches what you were told.
- The number of years and the monthly payment are written down.
- You know the date of the first payment and whether interest builds before it.
- You know what the business is pledging and whether you are signing a personal guarantee.
- You have kept every email and form, including the IRS Form 4506-T the SBA asks applicants to sign.
- You know who to call. The SBA disaster customer service line is 1-800-659-2955.
If anything is unclear, ask a local Small Business Development Center or a trusted accountant to read the offer with you. A second pair of eyes is cheap. This is general information only, so ask a lawyer or a CPA about your own loan, and know that your signed offer controls.
Sources
- SBA, news release of June 17, 2020, "SBA's Economic Injury Disaster Loans and Advance Program Reopened to All Eligible Small Businesses and Non-Profits Impacted by COVID-19 Pandemic."
- SBA, Disaster Loan Assistance, Economic Injury Disaster Loans (disasterloan.sba.gov), page as archived July 3, 2020.
- Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, section 1110 (congress.gov).