Updates to the EIDL Loan by Danielle Stubbs
During the pandemic, many small businesses took advantage of the EIDL Program (COVID-19 Economic Injury Disaster Loan). Implemented by the Small Business Administration, this program was designed to support the recovery of small businesses from the economic impacts of COVID-19.These loans were attractive to many, as they were designed to be low-interest, fixed rate loans for business owners to cover the expense of business operation (payroll, rent, utilities, etc.).
Now that we are officially out of the pandemic, it is important to be aware of the updates to the EIDL Program and the deadlines attached to it. First, as of January 1, 2022, the Small Business Administration (SBA) stopped accepting new applications for the loan. For those who requested a loan prior to that date, the deadline to process loan increase requests or requests for reconsideration was May 6, 2022. Furthermore, as of May 16, 2022, the online EIDL portal has been closed (those who need copies of their loan documents should call 833-853-5638).
Another important update to be aware of is a new payment deferment that took effect in March of this year. In this update, the SBA extended the deferment period to 30 months. Thus, those who received EIDL funds do not have to begin repayments until 30 months after the date of the loan, at which point they will be responsible for making regular payments on the loan and will have the remainder of the loan’s 30-year life to fully pay it off.
While the 30-year life of the loan may seem like a favor to small business owners, it can cause a headache if they decide to sell the business before their EIDL loan is paid off. Because most EIDL loans did not have personal guarantees, many business owners are under the impression that they can sell the business and be released from liability. However, this is not the case. Because the EIDL loan is secured by the assets of the business, selling a business that is still under the EIDL loan will require the seller to gain permission from the SBA. Once notifying the SBA of the desire to sell one’s business, a business owner will likely be told one of three things: (1) the loan must be paid off before the business can be sold, (2) the business can be sold, but the proceeds of the sale must go towards paying off the loan, and (3) the business can be sold, and the ownership of the loan will be transferred to the buyer.
An important thing to note regarding the third option is the fact that if the SBA allows the business to be sold and the loan to be transferred, the buyer must also comply with the loan requirements. Thus, if the proposed buyer does not meet SBA loan requirements, the sale may not be approved. If the sale is approved, the SBA may require a personal guarantee from the proposed buyer as an added security protection in the event the business fails in the hands of the new owner.
To avoid the potential requirement of a personal guarantee or the refusal of the SBA to allow the transaction to take place, business sellers may want to create a purchase option that can only be executed once the buyer can bring enough money to the table to pay off the EIDL loan. Other sellers may decide to pay off the loan themselves and reflect the amount in the asking price of the business.
Regardless of how a business owner wants to undertake the selling of their business, their best course of action will involve obtaining legal advice from an experienced attorney. The Miller Law Firm, P.A. stands ready to advise those seeking to sell or buy a business. Feel free to give us a call at (864)527-0413.
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