During the early days of the COVID-19 pandemic, the Small Business Administration (SBA) launched a program called the Economic Injury Disaster Loan (EIDL), which helped small businesses cover their operating expenses while the pandemic continued. For many, the EIDL was the only thing that got them through lockdown. Now, the time has come for many to repay their EIDL, and the SBA is more aggressive in collecting payments. Business owners are overwhelmed. If you are struggling, you’re not alone - the government estimates that the EIDL default rate is 37%. It’s important to understand your options and what can happen to you and your business if you default on your EIDL. But this isn’t the day to hit the panic button!
EIDL Hardship Program
So what does it take to qualify for hardship relief? Start with what the program is: the SBA offers a temporary program that lets you reduce your payment by half for six months. To qualify, your loan has to be less than 90 days past due at the time you apply, and it can’t be in a charged-off status. You’ll have to explain how you got into this financial bind and why it is temporary.
A potential downside to the EIDL hardship program is that interest continues to accrue during the six months you’re paying less. That means your loan balance will grow, and when the reduced payment period is over you’ll face a larger final payment. In the short term it gives you breathing room, but it’s not a long-term solution. And keep in mind the program isn’t always available, so check the SBA’s website to see if it’s currently open and what the eligibility requirements are.
It also helps to understand why so many borrowers need this relief in the first place. The COVID EIDL loans were 30-year loans for small businesses with a 3.75% interest rate, or 2.75% if you’re a private nonprofit. If you took out more than $25,000, you had to put up collateral, and if you took out more than $200,000 you had to sign a personal guarantee. The SBA let you defer payments for two years, which sounds great, but during that time the interest still rolled on, so your balance grew before your first payment hit. Some borrowers thought the EIDL would be forgiven, and now they’re struggling to repay it.
To be clear, there’s no forgiveness program for EIDL loans - unlike PPP loans, they are not forgivable. The only exception was that the EIDL advance (up to $10,000) was automatically forgiven, but you still have to pay the EIDL loan. If you personally guaranteed the loan, you must repay it even if your business closes.
SBA Offer in Compromise
If the hardship program is closed to you, or not enough, there is one more option. The SBA Offer in Compromise is a special program that lets you pay less than the full amount owed on your SBA Economic Injury Disaster Loan. It’s not easy to get one approved - it’s only available in very specific cases. You have to close your business and sell all of your assets in a way that complies with SBA rules. You’ll need to provide a lot of documentation with your application. Because the SBA only accepts these offers in limited circumstances and it’s uncommon to get approval, you should hire an attorney to make sure you qualify and prepare the application correctly.
The EIDL Defaults After 120 Days of Missed Payments
What happens when an EIDL defaults? If you’re not eligible for the hardship program or an offer in compromise, or if you’re still unable to pay even after a hardship plan, the EIDL defaults after 120 days of missed payments. Once it defaults, the SBA may transfer your debt to the Treasury Offset Program (TOP) or the Cross-Servicing Program. That gives the government powerful tools: withholding tax refunds, Social Security or other federal benefits, garnishing wages without a court order, and levying bank accounts. These actions happen quickly and are tough to stop once they start.
Personally guaranteeing a debt basically means that you are promising to pay the debt if the primary borrower cannot pay it. For loans larger than $200,000 you have an EIDL personal guarantee. If you get into default, the SBA can pursue you directly and go after your personal assets, even if your business is closed. It can place liens on your property or sue you for the remaining balance. Once that personal guarantee is enforced, your personal assets and income are on the line until the debt is resolved.
If you default on an EIDL loan, the situation is worse than just owing more money. Your default will be reported to the major credit bureaus and will lower your credit score, for both your business and personal finances. New loans and financing will become difficult and expensive to secure. In general, borrowers who default on their EIDL will be ineligible for future federal funding. And if the government needs to take action to get its money back, it can add collection fees to your balance to cover the administrative costs. These fees and penalties can dramatically increase what you owe.
The EIDL hardship program can give you a breather on your payments, but only if you qualify before it’s too late. You have to be under 90 days past due and not charged off yet. It won’t solve the problem forever, though. You might hear about an offer in compromise, but those are rare. Once a loan defaults at 120 days and the SBA hands it off for collection, you can face personal liability, a hit to your credit, and collection fees. Don’t wait - learn what your options are early, while you still have them.
