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EIDL Loans: Borrower Beware!

Posted by Res Nova Law | Jan 26, 2021 | 0 Comments

The Economic Injury Disaster Loans (EIDL) being distributed under the CARES Act have been a godsend for many small to midsize companies. However, many are surprised to find that there are strange and problematic requirements hidden in the legal documents.

The EIDL packages contain the standard loan agreement and note, but many small business owners are surprised by the personal guaranty documents.  By signing the guaranty, business owners put at risk their personal assets which become available to the government should the company defaults on its payments. 

Additionally, while many creditors require security agreements and use some of the business assets for collateral, the SBA's EIDL definition of collateral includes all tangible and intangible property of the company, which is essentially the entire business.  This is important to understand because if the business defaults on the payments – for whatever reason – absolutely every business asset is available for the government to take or foreclose upon as partial payment on the loan.

The EIDL package also contains several miscellaneous provisions regarding the business owners' operation of the business, including the following:

  • If there are any additional loans or liens in place from other organizations that are not the government, the business cannot borrow additional funds (or advances) from these organizations without the prior written approval of the SBA.

  • The business cannot relocate using the funds without the SBA's approval.

  • The business must use best efforts to use the funds on American-made products.

Further, if the business misuses the funds there is a minimum civil penalty equal to 150% of the value of the loan, and there may be additional civil and criminal consequences for material misrepresentations made in connection with the misuse of these funds.

In sum, if you are considering making use of the EIDL loans, read your loan documents very carefully and create a system for complying with each requirement. Your business and personal assets depend on it.

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