What happens to my EIDL loan if I go out of business?

What happens to EIDL if a business closes depends on the size of the EIDL loan you received and whether you offered a personal guarantee.

What is an EIDL loan?

EIDL stands for Economic Injury Disaster Loan. It’s a federal loan program administered by the Small Business Administration (SBA) to help businesses weather economic downturns.

Can I Close My Business with an Outstanding EIDL Loan?

Business owners who received EIDL loans through the SBA (U.S. Small Business Administration) have asked “Can I close my business with an outstanding EIDL loan, or do I need to file for bankruptcy?”

Whether you can close your business with an outstanding EIDL loan or need to file for bankruptcy depends largely on the amount of the EIDL loan your business received and the conditions attached to that loan:

EIDL Loans Less Than $25,000

These loans are unsecured, meaning there is no collateral attached to them, and no personal guarantees are required.

If you close your business and have an outstanding EIDL loan of less than $25,000, the SBA has limited options to recover the loan since there’s no collateral. Therefore, filing for bankruptcy may not be necessary, but it’s still advisable to consult with a lawyer to understand any potential legal implications or residual liabilities. If you have other business liabilities or personal guarantees for business debts plus your EIDL loan, you may still want to consider filing for bankruptcy.

EIDL Loans Between $25,000 and $200,000

These loans are secured by business assets but may not require personal guarantees. This means the SBA can seek possession of the business assets used as collateral to recover the loan amount if the business closes.

Whether you should file for bankruptcy in this scenario is more complex and depends on specific factors such as the value of the secured assets, other outstanding debts, and the overall financial health of the business. Consulting a bankruptcy attorney can help determine if bankruptcy would be a beneficial strategy to manage the business closure and associated debts.

EIDL Loans Over $200,000

These loans likely require a personal guarantee, which means you are personally liable for the debt if the business cannot repay it.

In cases where the business is closed and cannot cover the loan amount, personal assets may be at risk. Discussing both business and personal bankruptcy options with a lawyer is crucial because this could provide a structured way to handle both business and personal liabilities.

General Considerations

Closing a Business

Simply closing your business does not eliminate your obligation to repay the EIDL loan. The loan terms continue to apply, and the SBA has the right to pursue recovery based on the terms of the loan (secured vs. unsecured, presence of personal guarantees).

Bankruptcy: Bankruptcy might be a viable option if the business’s financial situation is dire, and it lacks the resources to settle its debts, including the EIDL loan. Bankruptcy could potentially allow for a structured settlement of debts or even discharge of certain obligations, depending on the bankruptcy chapter filed (Chapter 7, Chapter 11, etc.).

Are EIDL loans personally guaranteed?

EIDL loans aren’t always personally guaranteed, but it depends on the size of the loan:

• Loans under $25,000: No personal guarantee required
• Loans over $200,000: Require a personal guarantee

So, if your EIDL loan was for less than $25,000, you likely didn’t have to personally guarantee it. But for loans exceeding $200,000, you would have had to sign a personal guarantee, making you responsible for repaying the loan even if your business closes.

It’s always wise to double-check your loan documents to see if you have a personal guarantee. If you’re unsure about anything related to your EIDL loan, consult Jim Gaudiosi today for free.

Can I Get my EIDL Loan Forgiven?

No, the standard EIDL loan itself is not forgivable. This information is available on the SBA website.

However, there’s a distinction to make:

• EIDL Loan: This is the main loan program, and it requires repayment of the full amount.
• EIDL Advance: This was a separate program offered during the COVID-19 pandemic that provided a cash advance of up to $10,000 per employee. This advance could potentially be forgiven under certain circumstances.

It’s important to remember the distinction between the two if you received funds from the SBA.

What Are the Terms of an EIDL Loan?

The terms of an Economic Injury Disaster Loan (EIDL) are designed to provide relief to businesses impacted by events like the COVID-19 pandemic. Here’s a breakdown of the key terms:

Loan Amount and Cap

EIDL loans can cover up to six months of working capital or operating expenses, with a cap of $150,000 for businesses that qualify.

Interest Rate and Repayment Term

The interest rate for EIDL loans is low, at 3.75% APR (fixed), with a 2.75% APR available for nonprofit organizations. The repayment term is 30 years, offering flexibility for businesses to manage their finances.

Deferment

Loans are automatically placed into deferment for the first year, with repayment starting a year from when the initial loan was received. However, businesses have the option to start repaying the loan immediately if preferred.

Collateral Requirement

For loans exceeding $25,000, collateral is required to guarantee the loan. Collateral can include various business assets such as inventory, equipment, trademarks, and copyrights.

Business Structure Restrictions

Businesses must maintain their existing structure for the duration of the loan. Any changes to the business structure, such as from a sole proprietorship to an S corporation, require approval from the Small Business Administration (SBA).

Usage Restrictions

EIDL funds can be used for specific purposes, including rent, utilities, inventory, accounts payable, and office supplies. However, they cannot be used for certain expenses like relocation costs, bonuses, loan repayment, or facility repairs. For larger EIDL loans, the government may require proof of how funds were spent. 

If funds were used for unauthorized purposes, the government may challenge any form of debt relief including discharge in bankruptcy. Before requesting any type of debt relief or forgiveness, make sure you have records attesting to how the funds were used.

Forgiveness

Unlike the Paycheck Protection Program (PPP) loan, EIDL loans are not eligible for forgiveness. However, there was an option for loan advances, which are no longer available.

Eligibility

To qualify for an EIDL loan, businesses must have fewer than 500 employees and meet certain criteria outlined by the SBA. Certain types of businesses, such as those engaged in illegal activities or lobbying, are prohibited from obtaining EIDL loans.

In summary, EIDL loans offer favorable terms such as low-interest rates, long repayment periods, and flexible usage. However, businesses should carefully consider the restrictions and eligibility criteria before applying.

Frequently asked questions

What Happens to an SBA EIDL Loan if a Business Closes?

The consequences of closing your business with an outstanding EIDL loan depend on the loan amount and whether you provided a personal guarantee. Here’s a breakdown:

Loan Amount:

Under $25,000: These loans are typically unsecured, meaning no collateral or personal guarantees were required. If your business closes, the SBA’s options for recovering the funds are limited. They might try to seize federal assets you hold, like tax refunds, but generally can’t go after your assets or remaining business property.

$25,000 to $200,000: In this range, the SBA usually requires collateral from the business, such as equipment or inventory. If you close and default, they may seize these assets to partially satisfy the debt.

Over $200,000: These loans often require both collateral and a personal guarantee from the owner. If the business can’t repay, the SBA could seize business assets and potentially come after your assets (like a car or house) to settle the remaining debt.

Additional Considerations

Chapter 11 Bankruptcy: Even with a personal guarantee, filing for Chapter 11 might offer protection depending on the situation. However, consult a bankruptcy attorney for specific advice as this is a complex legal matter. Filing a Chapter 11 bankruptcy would typically be for business owners wanting to keep their business and continue operations while negotiating with creditors, formulating a plan for repayment of debt, and court approval. If the business is closing or is already closed, chapter 7 may be a better option.

Offer in Compromise

After closing the business, you might be eligible to negotiate an offer-in-compromise with the SBA. This allows you to settle the debt with a lump sum payment lower than the total owed.

What Can I Use an EIDL Loan for?

Economic Injury Disaster Loans (EIDLs) can be used to provide economic relief to small businesses that have suffered substantial economic injury due to a disaster, such as the COVID-19 pandemic. Here’s a breakdown of what EIDL loans can be used for:

Working Capital

EIDL funds can be used to cover ordinary and necessary operating expenses necessary to keep the business afloat during the disaster recovery period. This includes expenses such as payroll, rent, utilities, and insurance payments.

Accounts Payable

Businesses can use EIDL funds to pay outstanding bills and obligations incurred before the disaster occurred. This can include payments to suppliers, vendors, and contractors.

Debt Repayment

EIDL loans can be used to make payments on existing debt obligations, including mortgages, loans, and other liabilities, as long as the debt was incurred before the disaster.

Inventory

Businesses can use EIDL funds to replenish inventory that was damaged or depleted as a result of the disaster. This includes purchasing raw materials, goods, and supplies necessary for the operation of the business.

Operating Expenses

EIDL funds can be used to cover a wide range of operating expenses necessary to maintain the day-to-day operations of the business. This includes expenses such as marketing, advertising, office supplies, and equipment maintenance.

Other Essential Business Expenses

EIDL funds can be used to cover other essential business expenses deemed necessary for the continuation of business operations. This may include expenses related to compliance with health and safety regulations, professional fees, and other costs directly related to the operation of the business.

It’s important to note that EIDL funds cannot be used for purposes unrelated to the disaster recovery efforts. Businesses are required to use the funds by the terms and conditions set forth by the Small Business Administration (SBA) and must maintain accurate records of how the funds are used for auditing purposes.

What if I Personally Guaranteed the Loan?

If you made a personal guarantee on the debt, it is important to know what, if anything, you have agreed to pledge as collateral for the loan. If your home or other personal assets were pledged as collateral, you may want to consider filing a Chapter 13 personal bankruptcy so you can pay back a percentage of the debt in a Chapter 13 plan. 

If there was no collateral pledged with the personal guarantee, then it might be better to file a personal Chapter 7 case to discharge the full amount of the loan. You should consult with a bankruptcy lawyer to discuss which strategy is best for both your business and personal debts.