March 10, 2021

The Pros and Cons of Economic Injury Disaster Loans

Administered by the Small Business Administration (SBA), EIDL loans can offer some financial relief and keep your business running amidst challenging times. In this post, we'll explain how the EIDL loan works, as well as the most notable pros and cons of this program.

What is an SBA Economic Injury Disaster Loan (EIDL)?

As long as you can prove your small business has suffered substantial economic injury because of the pandemic or another natural disaster, you may apply for an EIDL. While the SBA states you can borrow up to $2 million, the media has reported that most loans are capped to $150,000. Once you get approved and receive the funds, you can use them toward payroll, rent, and other working capital expenses. In the event you received the Paycheck Protection Program (PPP) loan, you can’t use the EIDL to pay for the same expenses. You’ll be able to pay back your loan at an interest rate of 3.75% and a loan term that ranges from 15 to 30 years.

The Pros of Economic Injury Disaster Loans:

Just like most financing products, EIDLs come with a number of advantages including:
  • Large Loan Amounts
You may borrow hundreds of thousands of dollars or even millions if you qualify. These large loan amounts are often difficult to obtain elsewhere.
  • Low Interest Rates
Compared to other loans you may find at a bank or credit union, EIDLs come with low interest rates. This can save you thousands of dollars over the life of your loan.
  • Longer Repayment Terms
While other business loans must be repaid within several years, you’ll have 15 to 30 years to repay an EIDL. Most likely, you’ll find the payments to be more affordable because you’ll be able to spread them out over time.
  • No Fees
You can take out an EIDL without worrying about additional fees like application fees, origination fees, and prepayment fees.
  • Not Limited to Small Businesses
As long as they meet the requirements, independent contractors and sole proprietorships can participate in the EIDL program.
  • Can Pay for Working Capital
The EIDL program was specifically created to help cover working capital expenses that will allow you to sustain your business. These may include employee paychecks, fixed debts, bills, and outstanding invoices. EIDL

The Cons of Economic Injury Disaster Loans:

The most noteworthy drawbacks of EIDLs are as follows:
  • Lengthy Application Process
It can take some to apply for an EIDL. As an EIDL applicant, you’ll need to provide a variety of documents such as the SBA Form 5, your business debt schedule, three years of business and personal tax returns, income statements, and balance sheets.
  • Credit Check
If you submit an EIDL loan application, your business credit will be checked. This can be a disadvantage if you don’t have the best business credit history as it may reduce your chances of approval.
  • Potential Collateral Necessary
You may need to secure an EIDL with collateral, especially if you borrow more than $25,000. Some examples of collateral you may have to put up include equipment, vehicles, computes, and furniture.
  • Usage Requirements
Unfortunately, business owners can’t use the funds to cover any expenses they'd like. Instead, the funds must be used toward working capital so they won’t help you if you’d like to refinance debt or expand operations.
  • Bookkeeping Requirements
To ensure you’re using the funds properly, the SBA will require you to keep accurate books for the most recent five years and continue to do so until at least three years after your loan matures or you pay it off.
  • Funding Takes Time
If you get approved for an EIDL loan, don’t expect to receive your funds right away. Since this product is popular, especially during the COVID-19 era, it may take weeks or even months for the money to hit your account.
  • Not Forgivable
Unlike the PPP loan, an EIDL isn't forgivable so you’re required to repay it after you take it out.

How to Apply for the EIDL Program

If you believe you’re a good candidate for the economic injury disaster loan program, there are three ways you may apply. Here are the details:
  • Online: To apply for an EIDL loan online, you can visit the SBA’s website to complete the application.
  • Mail: To apply via mail, you can print out the application and send it to: 14925 Kingsport Rd. Ft. Worth, TX 76155-2243.
  • In-Person: If you prefer the traditional route of an in-person application, go to a local Disaster Recovery Center so an SBA loan rep can help you out.

Economic Injury Disaster Loans Can Save Your Business

A disaster like the coronavirus pandemic can strike when you least expect it and take a serious toll on your business. With an EIDL to cover working capital, you can sustain your operations and make it through a difficult time. Before you take one out, however, make sure you’ll be able to repay the loan and feel confident that it will help, rather than hurt your business.