If your business can’t make its EIDL payments, the first thing to know is that you’re not alone. And the second, you have options. My guess is you haven’t called the SBA yet because you’ve been doing everything you can to make the payment. You’ve probably even pulled other loans, maxed out business and personal credit cards, and maybe even started dipping into cash reserves to cover the costs. Just because you’re struggling doesn’t mean you aren’t good at running a business. Because a debt, especially a federal debt, doesn’t just sit there on a spreadsheet. It sits on your shoulder. Here is what happens when an EIDL loan goes unpaid, what the SBA can do, and what you can do about it.
Both Economic Injury Disaster Loans and EIDL Grants were created to help small businesses cope with the economic fallout from the COVID-19 pandemic. EIDL loan funds are used to support working capital and operating expenses. EIDL loans are not forgivable and must be repaid, while EIDL Grants do not have to be repaid. For the EIDL loan, the most you could borrow was $2 million, at an interest rate of no more than 4%, for up to 30 years. There were no prepayment penalty or fees. Generous terms, but a debt that never goes away on its own.
Delinquent or Default
The SBA puts a borrower who stops paying into one of two categories, delinquent or default. When we say that a loan is delinquent, we mean that the borrower is behind on payments, but the lender still expects to get all or some of its money back. The lender might charge a late fee, start calling to collect, restructure the loan, offer to extend it so that the monthly payments are lower, or allow interest-only payments for a while. The lender usually gives you 30 days to make a payment when they contact you about a delinquent loan. At this stage, it is still possible to work something out with your lender to improve the chance that you’ll repay the loan. If the borrower keeps missing payments and can’t work out a plan with the bank or the SBA, the loan will go into default.
Default is a different situation. A loan is in default when the lender decides that the borrower won’t be able to pay it back. If you do default, the lender may have a right to take the property you used as collateral and sell it to cover the debt, depending on the law in your state. It could also demand that someone who signed as a guarantor pay back the loan, or it might sue the borrower or the guarantor. The SBA will send a letter demanding repayment and it can also initiate litigation against the borrower or the guarantor. A default also hurts your credit in a big way - both business and personal. The SBA can also lien and levy federally held assets, such as tax refunds. The default will also be reported to the IRS, and you may have to recognize income in the amount of the defaulted loan that is not repaid.
How exposed you are depends a great deal on how much you borrowed. If your EIDL loan was $25,000 or less, there is no collateral or guarantee required. If it’s more than $25,000 but less than $200,000 you will have to put up some collateral in the form of a UCC-1 filing and a Security Agreement, but generally no personal guarantee. If you default on the loan, they can then take the collateral, which could be things like accounts receivable, inventory or equipment, and sell it to get the money they are owed. If the loan is more than $200,000, you will need both collateral and a personal guarantee.
Offer in Compromise
So what can you do once the loan is in default? You can offer to pay some money toward settling the loan, or you can submit an Offer in Compromise form to an SBA Loan Officer that tells them your financial situation and the amount you can pay as a final, full payment to satisfy the loan. Lenders have rights and remedies, and they could take you to court. That means preparing for litigation even while you negotiate.
May File Chapter 7, 13 or 11
Bankruptcy should be a last resort. Still, an individual with an EIDL loan may file chapter 7, 13 or 11. Chapter 7 is liquidation and the business will close. Chapter 13 is a payment plan that will run between three and five years and is only for individuals. Chapter 11 is reorganization or liquidation, and is for individuals or businesses. A small business that has received an EIDL loan may file under chapter 7, chapter 11, or Subchapter V of chapter 11 (a special type of chapter 11 for small businesses). EIDL loans may be discharged in a chapter 7 filing. Any assets that were pledged as collateral (equipment, accounts receivable, and so on) would become the lender’s property. Someone who promised to pay an EIDL loan on behalf of a business could get sued if the business can’t, and then that person would have to work out something outside of court or file for bankruptcy.
You need to have a strategic plan, put the right people around the table and you need to open lines of communication with the creditors, particularly with the SBA. You can’t build a wall around yourself and expect the numbers to work. Sometimes the mere fact that we have gotten this far means that we’re being brave. We’re taking the first step to make things right again. The earlier you start that conversation, the more room there is to negotiate.
