What about your EIDL Loan?

If you have an EIDL loan (Economic Injury Disaster Loans offered by the Small Business Association), what do you need to know about future loan transactions?

• What about buying a new business?
• What about refinancing a current business?
• What about selling my business?

Many of our clients have an EIDL loan. We encouraged our clients to obtain these during the most restrictive part of the COVID pandemic. These low interest loans gave needed relief to some of the hardest hit industries, including hospitality.

Selling a Business with an EIDL Loan:

• EIDL Loans Mostly Have to Be Paid off poor to sale: Any lender who is funding the purchase of a business with real estate will require that buyers own the property “free and clear”. This means that there cannot be any liens (claims from lenders) on the property or the business. So, sellers must pay off previous EIDL loans prior to or at closing.

• Perhaps One Exception:  Sellers may have multiple businesses or properties. Some sellers, especially larger corporate sellers, may have an EIDL for the parent company but not the smaller component business being sold. If the EIDL is for the parent business, the new lender may find a way to make an exception.

Paying off an EIDL at or before closing:  Be aware that the SBA does not accept payoff via wire. At closing the title or escrow company will have to make out a physical check for the balance of the EIDL. The borrower can find the balance on their SBA portal. The SBA website also has clear instructions for paying off the loan via mail.

I Have an EIDL and I want to Refinance

• Size matters!  If your EIDL loan is small, then the lender may agree to pay it off. They will roll the remainder of the EIDL into the total loan value. If the loan is larger, there are a few possibilities.

• Paying off an EIDL: You may be holding on to the proceeds of the loan (and therefore have cash on hand). But new lenders will not consider the proceeds of the EIDL as an asset without also considering your EIDL loan as a liability. Therefore, a large EIDL may negatively impact your debt to income ratio. The lender may consider that you have too much debt and require you to pay off or pay down the loan.

• Subordinating an EIDL: Often lenders will agree to subordinate an EIDL. This means that they will request permission from the SBA to delay receiving payments for the EIDL until the mortgage has been paid off. Borrowers have to officially request subordination and the SBA has to grant it. This process is not automatic. In addition, requesting subordination can take some time. We have found that subordination happens most easily when we work with our network of SBA preferred lending partners.

I Have Other Businesses with EIDL loans and I’m Getting a New Loan:

The lender will underwrite your entire file and look at your affiliate businesses. If your other businesses are cash flowing and covering your debts, there are no issues with other EIDL loans. We are happy to help you do a self-evaluation of your cash position for all of your businesses. This will help you if you need to make your portfolio stronger prior to looking for financing.

If you are considering a loan for purchase or refinance and would like to discuss your plans,  feel free to contact our team.  We have a network of lenders and can find the best match for your funding needs, saving you time and money, so you can focus on running your business.