Think Twice Before Accepting an Economic Impact Disaster Loan (EIDL)

Many of our clients have applied for and received the EIDL (“Economic Impact Disaster Loan”). These loans were presented to the public as a low interest, long-term note, designed to bridge the economic hardship presented by the COVID Virus. In truth, there are several restrictions on these loans that most borrowers would violate without even realizing it. Because of these terms, our firm strongly discourages businesses from taking these loans.

Troubling Terms and Analysis

  1. Borrower authorizes SBA to make or cause to be made, at Borrower’s expense and in such a manner and at such times as SBA may require:
    • Inspections and audits of any books, records and paper in the custody or control of Borrower or others relating to the Borrower’s financial or business conditions, including the making of copies thereof and extracts therefrom
    • Inspections and appraisals of any of Borrower’s assets

**To understand these terms alone, you need to understand the costs associated with financial audits and appraisals. The cost of a financial audit will easily exceed $10,000. Commercial appraisals are expensive as well. Considering these can be required at any time the SBA wishes and they are done at the borrower’s expense, an honest analysis of the cost of the loan skyrockets. These loans are limited to $150,000 yet the SBA can impose substantial requirements on the borrower running up significant costs

  1. Borrower will furnish to SBA, no later than 3 months following the expiration of Borrower’s fiscal year and in such form as SBA may require, Borrower’s financial statements.

**Many of our clients are not in a position to issue accurate financial statements in this narrow of a delivery window. Additionally, they specify “in such form as SBA may require”. What does that mean? It certainly provides broad latitude to the SBA.

  1. Upon written request of SBA, Borrower will accompany such statements with an ‘Accountant’s Review Report’ prepared by an independent public accountant at Borrower’s expense.

**The cost of having a financial review is slightly less expensive than a financial audit but it too will likely cost $8,000 – $10,000. These types of terms radically change the cost of these loans. While the interest rate itself seems attractive, consider that the length of time you have the note increases your exposure to these additional costs. Borrower’s beware – you could be stuck with significant expenses due to having these loans.

  1. Borrower will not, without the prior written consent of SBA, make any distribution of Borrower’s assets, or give preferential treatment, make any advance, directly or indirectly, by way of loan, gift, bonus, or otherwise, to any owner or partner or any of its employees, or to any company directly or indirectly controlling or affiliated with or controlled by Borrower, or any other company.

**Well, let’s break down what this really says.

  • Cash is an asset. So, owners cannot take distributions from their company. Many of our clients have pass-through entities such as partnerships or S corporations. Partner and shareholder distributions are not allowed if you are a borrower of this loan.
  • Borrowers cannot give employee advances, employee bonuses, employee gifts, etc. This is true with all affiliated companies or any other company controlled by the Borrower.

Final Thought

So, what happens if you violate these terms? The loan document only references that the loan would be considered in default and immediately payable. However, there is additional language used within the terms of the note that indicates violating any terms could be considered loan fraud. See below:

MISUSE OF LOAN FUNDS: Anyone who wrongfully misapplies any proceeds of the loan will be civilly liable to SBA for one and one- half times the proceeds disbursed, in addition to other remedies allowed by law.

CIVIL AND CRIMINAL PENALTIES: Whoever wrongfully misapplies the proceeds of an SBA disaster loan shall be civilly liable to the Administrator in an amount equal to one-and-one half times the original principal amount of the loan under 15 U.S.C. 636(b).In addition, any false statement or misrepresentation to SBA may result in criminal, civil or administrative sanctions including, but not limited to: 1) fines, imprisonment or both, under 15 U.S.C. 645, 18 U.S.C. 1001, 18U.S.C. 1014, 18 U.S.C. 1040, 18 U.S.C. 3571, and any other applicable laws; 2) treble damages and civil penalties under the False Claims Act, 31 U.S.C. 3729; 3) double damages and civil penalties under the Program Fraud Civil Remedies Act, 31 U.S.C. 3802; and 4) suspension and/or debarment from all Federal procurement and non-procurement transactions. Statutory fines may increase if amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.

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