What You Need to Know If Your Struggling Business

Has an EIDL Loan

Let’s face it. Since the end of the pandemic, and the end of the easy flow of the Small Business Administration Paycheck Protection Plan (PPP loans) and Economic Injury Disaster Loan (EIDL) loans (along with increased inflation) many small businesses are struggling. While the PPP loans were subject to “Loan Forgiveness” the EIDL loans are not. 

Many small business owners who qualified for both programs and accepted funds from both programs may not have clearly understood the distinction in the repayment obligations. I mean, the media and the SBA were loudly announcing the “forgiveness” of PPP and how the loans were going to save jobs. But the EIDL loans are unforgiveable and MUST be paid back.

The consequences of an SBA EIDL loan default are real. “If a business borrower fails to pay back their EIDL loan, they will not be able to access federal aid again. Ever. On top of that, borrowers who default could see their wages garnished, among other consequences.” The SBA Will Keep Its Covid Loan Portfolio to Avoid Taking a $120 Billion Haircut | Inc.com

In early 2024, the SBA had created several hardship repayments plans and granted extensions for small business owners who were unable to repay their EIDL loans on their current repayment schedule. As of May 2024, the Small Business Administration announced that the EIDL default rate was about 37% (!) and due to high default, the SBA is not able to sell its loan portfolio to private lenders without a huge government loss.

For the business owners who want to sell or transfer their businesses and have an EIDL loan, the SBA must approve the sale or transfer. The EIDL payoff balance can be obtained by contacting the SBA Disaster Loan Servicing Center at (800) 736-6048 and the SBA will issue an EIDL Pay Off Letter. Please get this letter as early in the process as possible and have a plan to pay the balance at or before closing.

When there aren’t enough proceeds from the sale of a business and the loan cannot be paid off at closing, the seller of the business will have to negotiate directly with the SBA to repay the loan so the SBA will release its liens. Unfortunately, this negotiation may be lengthy and could affect the timeline to business closing.

Where a business is closing or seeking bankruptcy protection, the amount of the outstanding EIDL loan and its status (Delinquency or default) will determine the options available to the borrower. It’s again important to state that EIDL loans are not forgivable, even in bankruptcy for most circumstances. If you are facing business closure and have an EIDL loan, it is important to contact the SBA as soon as you believe that the business will be closing. It’s important to also make sure you have your specific loan terms and repayment plan reviewed by counsel to help you determine your options.