EIDL Series Post 1: The Only Certain Thing About Economic Injury Disaster Loans is Uncertainty

Updated: Feb 15

Part 1: The Only Certain Thing About Economic Injury Disaster Loans is Uncertainty


EIDL – Did we use the funds correctly? Can and will I be audited? Many say, no but the experts suggest you better be ready for what is ahead.


This is the first post in a multi-post blog regarding some of the ambiguous areas of the EIDL program which as to date funded nearly 4 million small businesses.


By Thomas W. Tramaglini, Managing Director at BRP Onesta info@BRPOnesta.com www.backofficedepot.com

One of the biggest questions that our clients ask our advisors was and is how Economic Injury Disaster Loans (EIDL) funds can be used. We always advise our clients to consult with their accountants but from our communications with small business owners we know that many do not consult their accountants until it is too late.


Remember, EIDL funds are not forgivable - Unlike the Payroll Protection Program (PPP) the EIDL program is a loan that is NOT forgiven by the Federal Government. That is… yes, you must pay it back.


On the surface the EIDL loans were exactly what was needed for many businesses in 2020 (beginning approximately in March). In fact, to date, according to the SBA1 has provided over $316 Billion Dollars in Pandemic Relief funding to small businesses. (For more on these statistics and how much the Feds will get in return for lending the EIDL funds go to https://tinyurl.com/yckcm2hj). That comes to over 3,865,600 different approvals throughout the United States and eligible territories. In comparison to PPP funds ($790,921,572,3582), EIDL funding provided approximately 60% less funding to small business owners to sustain their businesses during the pandemic.


However, did EIDL funds really help small businesses “survive” during the pandemic?


First and foremost, according to the EIDL Regulations:


“Economic injury loan proceeds can only be used for working capital necessary to carry the concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury.”


In December of 2021, we surveyed over 2,400 of our clients regarding a host of different issues including their business financing. Of the over 2,400 clients, we received over 900 responses (41.2% response rate). Inherent in the responses some of our feedback was interesting to say the least.


Top 5 Uses of EIDL From Our Business Owners 2021 Survey


Operational expenses (payroll, costs for expenses such as supplies)

Pay off existing debt (credit cards and merchant cash advances)

Purchase new equipment and vehicles

Hire new employees

Pay off back taxes incurred before the pandemic


Overall, the use of EIDL seems to be mixed with regards to what SBA has provided and updated as allowable uses for the EIDL funds.


The SBA has posted their FAQs on what the allowable uses are at https://www.sba.gov/sites/default/files/2020-09/COVID%20EIDL%20FAQ%20FINAL%20APPROVED-508.pdf.


For instance, when EIDL was launched in 2020 for Pandemic Relief one could not use the funds to pay off long term debt however, in September 2021 SBA updated its guidance (13 CFR 123.3033) to include the payments being made to long term debt as included in allowable uses. SBA guidance is ambiguous to what is long term debt and what is not long-term debt. That is, what the SBA sees as long-term debt and what our clients see as long-term debt may be different. Clearly, from what our clients told us in their surveys the used their funds to pay for things like their Merchant Cash Advances which are not loans and are recognized as advances of future receivables and not long-term debt. Further, many of our clients expressed using their EIDL loans to pay for credit card debt. It is also clear from their responses that while the revision of the guidance seems to include credit card debt for the business, small business owners who have LLCs or partnerships, many of the credit cards may not be in the name of the business or separated from personal uses.


Other uses which seem to not jive with the SBA guidance were noted in responses:

  • What I used the funds for:

  • Equipment Purchases

  • Starting a New Business

  • Hiring More Staff

  • Real Estate Purchase

  • Purchase of Vehicles

  • Purchases for split personal/business uses


From what we believe our interpretation to be from the guidance, many of these uses are not going to be acceptable when Audits are included.


“Economic injury loan proceeds can only be used for working capital necessary to carry the concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury.”

Obviously, clients expressed the need for more funds during this time to sustain their businesses, yet it is also clear to us that many business owners (some our clients) do not have a grasp on how to appropriately use their funds. Overall, from our analyses using several surveys some small business owners replaced their use of short-term funding solutions with both PPP and EIDL funding. This is clear from the MCA industry where Gunes Kugaligil of Methodical Management underscored the effects of the Pandemic on the industry in deBanked (Brendan Garrett 6.8.20204). MCA companies clearly took a hit, but their lending was also significantly cut and in most cases MCA companies from OnDeck to PayPal and brokers helped originate billions in EIDL and PPP funding.


EIDL Audits?


So, the question lingers: What oversight will come from the EIDL Loans? WHO GETS AUDITED AND WHO DOES NOT?


There is guidance from SBA on who is required to get an independent (CPA via OMB guidance) audit (Currently, the threshold is anyone who received over $750,000), for borrowers who accepted less than $750,000 there is little indication of who and who will not be audited. For those receiving over $750,000 audits were supposed to be done and reported by the 3rd Quarter of 2021. Yet, for those who have been receiving more funds or were under the $750,000 it is not clear how SBA will or will not do audits.


It has been widely reported that5 the SBA via the Department of the Treasury hurried to release funds during the first few months of SBA causing many loans to be provided which should not have. In fact, one of our hottest services requested for months has been EIDL Reconsideration for an extension of the original EIDL funding and clearly the SBA has denied a ton of businesses for more funds because they were either funded incorrectly or should not have received EIDL funds originally.


Regardless, those who received any EIDL funds should cautiously prepare their books for submitting back up data for audits that do occur. After consultation with our accountants, we at BRP Onesta believe the EIDL Audits from SBA will be like how the IRS audits taxpayers. Some desk audits and some in person – subsequently, we believe that the SBA will 1) highlight those who they find massively cheated on their applications and did not get caught and 2) will seek the repayment of more funds than currently expecting to be repaid with interest (see Thomas W Tramaglini Blog Post on 12.23.2021).


Therefore, if you are a small business owner, you need to be ready:


What were funds not to be used for? A succinct overview of the allowable uses was done by NAV. According to NAV:


“EIDL proceeds may not be used for:


  • Payment of any dividends or bonuses;

  • Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant;

  • Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal;

  • Expansion of facilities or acquisition of fixed assets;

  • Repair or replacement of physical damages;

  • Refinancing long term debt (see change described below)

  • Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act. Federal Deposit Insurance Corporation (FDIC) is not considered a Federal agency for this purpose;

  • Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations. (Note: There is an entire section that goes into more detail on paying federal debts. If you want to use EIDL proceeds that way, refer to page 75 of the SOP.)

  • Pay any penalty resulting from noncompliance with a law, regulation or order of a Federal, state, regional, or local agency.

  • Contractor malfeasance; and

  • Relocation”


SBA guidance can be found: https://www.sba.gov/article/2021/nov/19/sba-announces-updated-guidance-regarding-applicant-deadlines-covid-economic-injury-disaster-loan


So What?


As small business owners continue to operate in 2022, be prepared for your EIDL Audit, as it could come anytime. Perhaps one of the best things a small business owner can do is to have their books done and organized by a Certified Bookkeeper. If audited, this can allow your business to easily provide supporting documentation, so you do not have to repay additional EIDL funds or face criminal prosecution.


Also, Small Businesses should identify and store important records for audits as per Federal Guidelines on data retention. States also have individual laws that govern this area as well.


Regardless, small business owners should expect these audits to occur and prepare accordingly. Furthermore, if a small business misappropriated funding they should understand that the Department of Treasury has a host of tools to in place from requiring the return of funds to criminal action.


Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.


References:

1https://www.sba.gov/sites/default/files/2021-12/COVID-19%20EIDL%20TA%20STA_12232021_Public-508.pdf

2https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-data

3https://public-inspection.federalregister.gov/2021-19232.pdf

4https://debanked.com/2020/06/impact-of-covid-19-on-the-merchant-cash-advance-market/

5https://www.nytimes.com/2021/11/30/business/sba-eidl-pandemic-relief.html

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