Sign an EIDL loan agreement? Read this.

June 07, 2020
Last week I wrote on an overview of government programs available to practice owners and included a bonus spreadsheet for tracking/justifying expenses related to each program. Perhaps not surprisingly, I received a lot of questions about the EIDL loan provisions. Quite frankly, they’re pretty onerous, and whether you’ve signed an EIDL loan agreement or are waiting for one, it’s worth noting certain verbiage and limitations so you can plan according. 

This is quite long, so if you don’t have an EIDL loan, hang tight until next week! In other news, big changes to the PPP loans happened Friday, which you can read about HERE

Some disclosures: While I’ve reviewed quite a few of these in varying amounts and business structures, please read your own loan agreement to verify these terms apply to your situation. Also, I am not an attorney or SBA EIDL loan expert, and what’s listed is my opinion and my opinion only. I've only included the provisions I think are worth noting, so this does not represent the whole loan document. While all of this information is very important, if you start to glaze over, make sure you make it to the last paragraph, which is in my opinion the most important and onerous provision listed. Enjoy!
Language: PAYMENT TERMS- Each payment will be made when due even if at that time the full amount of the Loan has not yet been advanced or the authorized amount of the Loan has been reduced.

My interpretation: The payment is listed toward the top of the loan agreement. While most loans appear to be disbursed at one time, if your is broken into portion you may still owe the full payment even if the full amount hasn’t been given to you OR you didn’t accept the full amount for the loan.
Language: COLLATERAL- For loan amounts of greater than $25,000, Borrower hereby grants to SBA, the secured party hereunder, a continuing security interest in and to any and all “Collateral” as described herein to secure payment and performance of all debts, liabilities and obligations of Borrower to SBA hereunder without limitation, including but not limited to all interest, other fees and expenses (all hereinafter called “Obligations”).  The Collateral includes the following property that Borrower now owns or shall acquire or create immediately upon the acquisition or creation thereof: all tangible and intangible personal property, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security interest Borrower grants includes all accessions, attachments, accessories, parts, supplies and replacements for the Collateral, all products, proceeds and collections thereof and all records and data relating thereto.

My interpretation: Basically everything your practice owns is considered collateral. This gets sticky in the next section and the last paragraph I review.
Language: REQUIREMENTS RELATIVE TO COLLATERAL- Borrower will not sell or transfer any collateral (except normal inventory turnover in the ordinary course of business) described in the "Collateral" paragraph hereof without the prior written consent of SBA.

My Interpretation: While not every type is listed, all tangible property is pretty broad. I bolded the big items for most practices, but I would also consider display cases, computers and furniture to be tangible property. Thinking of renovating? You need to get permission to sell—or give away/throw away—old fixtures. Upgrading equipment and not keeping your old pieces? Better get prior written consent.
Language: REQUIREMENTS FOR USE OF LOAN PROCEEDS AND RECEIPTS- Borrower will obtain and itemize receipts (paid receipts, paid invoices or cancelled checks) and contracts for all Loan funds spent and retain these receipts for 3 years from the date of the final disbursement. Prior to each subsequent disbursement (if any) and whenever requested by SBA, Borrower will submit to SBA such itemization together with copies of the receipts.

Borrower will not use, directly or indirectly, any portion of the proceeds of this Loan to relocate without the prior written permission of SBA. The law prohibits the use of any portion of the proceeds of this Loan for voluntary relocation from the business area in which the disaster occurred. To request SBA's prior written permission to relocate, Borrower will present to SBA the reasons therefore and a description or address of the relocation site. Determinations of (1) whether a relocation is voluntary or otherwise, and (2) whether any site other than the disaster-affected location is within the business area in which the disaster occurred, will be made solely by SBA.

Borrower will, to the extent feasible, purchase only American-made equipment and products with the proceeds of this Loan.

My Interpretation: Document, document, document with receipts what you spend funds on. This says to hold onto it for 3 years but I would hold on to them until the loan is paid off. Thinking of relocating your practice? Indirectly using proceeds of the loan is pretty loose terminology (like freeing capital for a move), and best practice would be to get written permission. I believe this provision is there because of physical disaster loans like hurricanes but it’s worth noting. Last, I suggest if you choose not to buy American made equipment, you document the options you considered and why you chose what you chose in your folder with receipts.
Language: COMPENSATION FROM OTHER SOURCES- Eligibility for this disaster Loan is limited to disaster losses that are not compensated by other sources. Other sources include but are not limited to: (1) proceeds of policies of insurance or other indemnifications, (2) grants or other reimbursement (including loans) from government agencies or private organizations, (3) claims for civil liability against other individuals, organizations or governmental entities, and (4) salvage (including any sale or re-use) of items of damaged property.

Borrower will promptly notify SBA of the existence and status of any claim or application for such other compensation, and of the receipt of any such compensation, and Borrower will promptly submit the proceeds of same (not exceeding the outstanding balance of this Loan) to SBA.

My Interpretation: There’s some additional wording with this, but basically if you get any money coming in that is not normal course of business, you need to let the SBA know and they will determine if it’s a duplication of the disaster loan purpose. If it overlaps, you must use the proceeds to pay back the disaster loan. Where I think this could come into play for many practices is if there’s additional government funding available in a second wave of COVID or because of economic circumstances.
Language: DUTY TO MAINTAIN HAZARD INSURANCE- Within 12 months from the date of this Loan Authorization and Agreement the Borrower will provide proof of an active and in effect hazard insurance policy including fire, lightning, and extended coverage on all items used to secure this loan to at least 80% of the insurable value. Borrower will not cancel such coverage and will maintain such coverage throughout the entire term of this Loan. BORROWER MAY NOT BE ELIGIBLE FOR EITHER ANY FUTURE DISASTER ASSISTANCE OR SBA FINANCIAL ASSISTANCE IF THIS INSURANCE IS NOT MAINTAINED AS STIPULATED HEREIN THROUGHOUT THE ENTIRE TERM OF THIS LOAN.

My Interpretation: While I would hope practice owner’s have hazard insurance on their practice assets, if you don’t, you have 12 months to get some. And note, THIS IS A TO-DO—you MUST send the SBA a copy of said policy within 12 months at U.S. Small Business Administration, Office of Disaster Assistance, 14925 Kingsport Rd, Fort Worth, TX. 76155.
Language: BOOKS AND RECORDS-  Borrower will maintain current and proper books of account in a manner satisfactory to SBA for the most recent 5 years until 3 years after the date of maturity, including extensions, or the date this Loan is paid in full, whichever occurs first. Such books will include Borrower's financial and operating statements, insurance policies, tax returns and related filings, records of earnings distributed and dividends paid and records of compensation to officers, directors, holders of 10% or more of Borrower's capital stock, members, partners and proprietors.

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: (1) inspections and audits of any books, records and paper in the custody or control of Borrower or others relating to Borrower's financial or business conditions, including the making of copies thereof and extracts therefrom, and (2) inspections and appraisals of any of Borrower's assets.

Borrower will furnish to SBA, not later than 3 months following the expiration of Borrower's fiscal year and in such form as SBA may require, Borrower's financial statements.

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.

My Interpretation: Keep an SBA specific file of financial and operating statements, insurance policies, tax returns, and all compensation/distribution records for the 5 most recent years, to be maintained until 3 years after the loan is paid off. The SBA can ask for said file. It also appears borrowers are required to send financial statements within 3 months of their fiscal year. THIS IS ALSO AN ANNUAL TO-DO, although it’s not clear where to send them or what format they want. Last, the SBA can require an Accounts Review Report of your financials. Just note that is a next step up from what most accountants do on an annual basis and can be expensive.
Language: LIMITS ON DISTRIBUTION OF ASSETS- Borrower will not, without the prior written consent of SBA, make any distribution of Borrower’s assets, or give any 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.

My Interpretation: This paragraph is the reason I am writing on the EIDL loan topic this week. It very clearly sates you need prior written consent of the SBA to make any distributions of the borrowers assets (cash is definitely an asset of your practice) via transfer, loan, gift, bonus or any other way to any owner, employee, or a company controlled directly or indirectly by the borrow.

For S-Corp owners who rely on distributions in addition to salary to cover their living expenses, take note here. I don’t know how easy it is to get consent from the SBA but you may need to add their help line to your speed dial if you are planning on having the loan outstanding for a long time. This is a good opportunity to adjust your salary to fair market wages though- something you should be doing anyway!

Note too that you have to have permission to give employees bonuses. You may want to make a note in your calendar to clear it with the SBA in October if you were planning on distributing year-end bonuses to your staff.

It's really important practice owners know what they've signed and plan accordingly. If you're expecting the EIDL loan to be a great loan term liability, think again if the provisions are too onerous on an ongoing basis, however, there's still a lot of uncertainty out there about what the fall and winter may look like. I'm advising clients to hang onto their EIDL funds just in case, but not to spend anything they wouldn't otherwise incur. 

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