EIDL Loans Explained

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Video Transcription:

Hi, I’m Donna Bordeaux CPA with Calculatedmoves.com. I want to take a moment to discuss the EIDL loans and the process, what we’re seeing and what you need to know. First off EIDL loans and grants. The application came online on March 29th. We have seen that the SBA has emailed people who have applied probably within those first two to three days. I’m seeing now to have them establish their logins and go-ahead to finalize the EIDL loans. The grants have already been set aside and taking care of. So those should be already a fixed factor. You either got them, or you did so far. So with the EIDL loans, here’s how we know they’re calculating. And these are just from our experience of looking at the numbers and trying to back into the calculations. The SBA has not published how they’re calculating these loans, but I can tell you from our experience, if you take the gross sales that were listed on the application, less the cost of goods sold number that was listed there, no matter how you defined it, whatever that number was that you’ve listed on your application, subtract those two, take 50% of that number and subtract out any EIDL grant that you may have received.

That was the thousand dollars per-employee amount. That is the dollar amount of the loan to a maximum of $150,000. Initially, they published that this was going to be up to $2 million in loans. It appears they back that number down just a bit to $150,000 maximum. So those are the numbers that we are seeing in our experience. So far, we have several clients who have received their funding. So the process is that you get an email, you set up a login, you’ll sign some documents electronically. They may email you on the side and ask for some other confirming information. And then once you receive the loan approval, you will electronically sign the loan documents. And we’re seeing within about two to three days that you’ll receive a direct deposit in your bank account for the proceeds. The first of those has showed up today.

So we’re starting to see the money flow. Those were both applications that were processed on Sunday night, March 29th. All right. So keep your eyes peeled and watch for that information. One other thing we’ve noticed if you don’t immediately respond to that loan amount, when you first logged in, you’ll be given a range. So for example, it might be 100,000 to 150,000, then you can pick and it’ll let you see what the payment amounts are and such. If you don’t immediately respond to that, they may reduce the amount. So be cautious on that. Go ahead and get your response in ASAP. I will tell you, I suggest taking the maximum amount that they will give you. If you’re going to do this loan, you can always repay and there’s no prepayment penalty. Alright, so take the money while you can. And while you have the opportunity to get it, you don’t know what the future holds, set it aside.

If you don’t feel comfortable spending it all, and you may want to repay it, set it aside in a savings account or someplace safe until you can make that final decision. Now, there are some very important things that you need to be aware of with this loan. And I want to talk about what is in the loan documents. This is not information that I have seen in the news or read anywhere else. So listen up. These documents are very restrictive. They’re talking about what the terms of your agreement in this loan are. And it appears to me that these are the same old documents they’ve been using for years with others who have had a whole different process to obtain an economic injury disaster loan. There are filled with gotchas. So if the SBA wants to come after you, later on, they have every ability to kit you.

Okay? So the restrictions that we are seeing within these loans, first off collateral, the collateral is listed specifically, and it basically says that every asset of your business is your collateral. There is no personal guarantee on these loans, but every asset of your business is the collateral. So if you own a vehicle, if you own a building, if you own equipment, if you have cash stored in the business, those are all assets that if you went into default, the SBA could take, all right. So you need to be aware of that. There were also several restrictions on what you can do with the money. First off, I want to read you what it says. The use of the loan proceeds is allowed to be. The borrower will use all proceeds of this loan solely as working capital to alleviate economic injury caused by the disaster occurring in the month of January 30, first, 2020, and continuing thereafter now, it also says that there will be a $100 charge for UCC filing.

I’ve not noticed that yet. We’ll see. So you need to make sure that you’re using the proceeds of this loan for working capital for most business owners. That’s not going to be that difficult because you’ve got expenses throughout the year of more than your loan amount in most cases. All right. So next up the part about distributions and what you can use the money for is also pretty darn restrictive. It says that you may not use the money for loans, payments, or distributions to any owners of the business or any related entities without prior written permission of the SBA. So if we take a very detailed thing, the thought process on this, that means you can’t pay yourself. Unless you ask the SBA. I don’t see any way possible that the IRS or the I’m sorry, the SBA is going to be able to say and do what these documents say.

They’re going to look at there are millions of businesses across the country getting these. There’s no way that they’re going to be able to go back and look at each and every loan holder to see, can I have permission to pay myself? Can I bonus money to myself? What if a business has a secondary entity that’s related? That is a crucial part of their business. There’s a lot to be said about these documents. They say a lot of information, but I don’t really think when push comes to shove, the SBA is going to be able to back up what’s in these documents with information, but we don’t know that for sure. So the other section in here that I found very interesting is that you are considered to be in default if you don’t pay your taxes. So any business taxes, payroll taxes, any taxes, if you fall behind, you’re technically in default, they could call the entire loan and take your collateral to pay it.

All right. It also says you need to keep your books and records in good order because they might request financial statements each year. For many businesses, not my clients, but many businesses. They don’t even have financial statements. Many don’t even get financials that ever, and they don’t have them prepared until about the time they do their taxes next year. And some of those are pretty loose. Alright, so keep good records, make sure you have documentation for all of your expenditures that will meet the criteria of this loan. If you were asked. So if we took an ultra-conservative position, you may want to hang onto the money until you see what’s going to happen with these restrictions. As I said, the loan documents are very restrictive, a couple other things to chat about here. This is a 30-year loan. There were no payments in the first 12 months when you do start to make payments.

And those are indicated in the loan documents, they will apply to interest first, and then whatever’s leftover will go to principal. So let’s do a little math. This is a 3.75%. So let’s assume that you received the maximum loan of $150,000. In year one your accrued interest will be $5,625. So you start making payments. The payments might be around six to $700 somewhere in that range. When you make those payments, it’s going to take you probably about a year and a half to two years before you start to hit any principal at all. They’re going to be interesting. Now, I don’t necessarily think that’s a terrible thing. Because the interest rate is only 3.75%. For most of you, you have things that are accruing more interest than that at a higher rate. So I wouldn’t necessarily shy away from it for that, but I do have a lot of people who are very nervous about taking on new debt.

And this will be in that case, you will still have that loan floating around. And it’s going to take you a good while before you start to get over the hump and make principal payments on that. So I’ll be talking with my clients to see if they really want to take 30 years to pay this off. Okay. The other real big question is what happens if you sell your business? What happens if you go out of business heaven forbid these loans basically say you can’t sell or do anything without the SBAs permission. They’re going to want to make sure they get paid off first. Now that is again, I’m kind of making a deal with the devil in that regard. So I want you to know what you’re walking into. I don’t want you to say no to this loan, just because of what I’ve told you.

If you are not sure, I’d suggest you go ahead and take this loan, get it in process. So they don’t reduce it and take the money away before you get the chance to accept it. But let’s have a conversation about how you want to handle it, what your concerns are and make sure that we have a valid plan in place to make this work in your best interest and that you feel comfortable and can sleep at night. Remember that there is no personal guarantee. That is the saving grace of this. Typically there would be a personal guarantee on an SBA loan. So anything you own personally would be at risk as well. So take this into consideration as you watch for your SBA loan information to come through. Let me know if you have any questions or if you’d like to discuss your concerns about this loan and how it affects your business. I’m Donna Bordeaux with Calculatedmoves.com. Thank you.

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.