We are glad to hear that the SBA has been busy notifying loan applications that their Economic Injury Relief and Disaster Loan (EIDL) has been approved. The question many of you have is whether or not to take the loan (please note the loan is different than the EIDL grant of up to $10,000 that many have already received).
Initially, the EIDL looked like an excellent loan and safety net for practices. The loan is easy to obtain, and it does not require any level of documented loss to obtain the funds. However, the SBA recently finished the final loan documents, and after reviewing the documents, we have several concerns. Based on those concerns, we believe the loan may not be a good fit for many of you for the following reasons:
- The loan documentation has a provision that the borrower would need to provide reviewed financial statements if requested by the SBA. There are three levels of financial statement services: audit, review, and compilation (Fluence provides compilations). Reviews require additional scrutiny of financial information as compared to compilations. If the SBA requested reviewed financial statements, it could result in a significant cost of $6,000 or more.
2. There are limits on how you can spend the EIDL. The restriction that has us most concerned involves distributions and dividends. Until the EIDL loan is paid back, owners cannot take distributions or dividends from their practice. The SBA allows an exception if owners receive written consent from the SBA to take distributions or dividends.
a. For our S-Corporation owners, this is a significant restriction. S-Corporation owners can still receive a salary, but they cannot take out money in addition to what they receive through payroll until the EIDL is paid back (without written consent from the SBA).
b. For LLCs and partnerships, the same basic rules apply, but members in these entities do not receive payroll; they receive distributions. Members can be paid distributions that represent reasonable compensation (typically 30 – 40% of collections). Members cannot receive more than that.
c. In either case, any unauthorized distributions could result in a penalty or worse. Examples of unauthorized distributions include having the practice pay for a personal expense of the owner or accidentally using the business credit card for a personal expense. The potential is high for accidentally breaking a provision of the loan agreement.
3. The intent of the EIDL is to provide necessary working capital to pay for operating expenses. The loan is intended to help practices survive until they can return to normal operations following a disaster. For practices with enough PPP loan money and/or with enough cash, this loan is likely not a good fit. The EIDL is not intended to keep as an emergency cash reserve.
4. Accepting the EIDL may prevent you from receiving other government assistance in the future. We are not sure how significant this restriction may be, but if there is another disaster, government assistance could be limited.
The Bottom Line:
- Based on what we have learned about the restrictions of the EIDL, we believe it is not a good fit for many clients.
- However, if you and your practice are truly in survival mode and you need this money to weather this storm, the EIDL is likely a good fit for you. You will need to prevent personal expenses from being paid by the practice, and you cannot take distributions as outlined in #2 above. If you need the EIDL to make it through this tough time, we do not think the concerns outlined in #1 and #4 above are strong enough reasons to prevent you from using the money.
- If you have questions about whether the loan is a good fit for you, please let us know. Also, if you have already accepted the EIDL and you now know it is not a good fit for you, we recommend you pay it back. If you are unsure, please contact us and we can discuss the next steps to take.