The COVID-19 pandemic brought unprecedented challenges to businesses across the world. Most of them had not anticipated such a disruption of business. While some businesses had to close down, some managed to pull through and the pandemic.
It is estimated that more than $200 billion has been approved by the Small Business Administration (SBA) in form of Economic Injury Disaster Loans (EIDLs) since the beginning of 2021. But the problem is that most of the people who have gotten approval notifications do not really understand how to use their EIDL loans.
This is probably because most business owners are new to government loan programs. They are afraid to use the loans in a way that will put them in trouble. Besides, the guidelines for the loan program are not as clear as many people expect.
As much as the EIDL loan approval process might be easy, it is important to have a proper plan before you put the loan into use. According to Lantern by SoFi, taking a government loan without knowing how to repay it can have negative financial consequences.
Here are ways EIDL Funds Can Be Used:
It is important to understand that EIDL loans are not specifically meant for the COVID-19 economic crisis. They have been in existent for many years as part of the SBA Disaster Loan program. Such loans often come into the public limelight when natural disasters such as floods and hurricanes strike.
Economic injury can be in form of increased expenditure, reduced working capital, accelerated debts, shortage of cash because of frozen receivables, or inventory among others. Proceeds from Economic injury loans can only be used as working capital to perform certain activities until normal operations resume.
Although there is no single list of how people should utilize EIDL funds, there are certain clues on the section of SOP that explain how to calculate economic injury. You should carefully read the SOP section to understand every aspect related to EIDL loans.
How EIDL Cannot Be Used
There are several ways that one can’t use the proceeds of a disaster loan. The list of such activities is found under the section of “ineligible proceeds”.
They include the following:
1. Disbursement to partners, owners, officers, stockholders, directors – unless they are directly involved with services that benefit the applicant.
2. Down payment of loans or refinancing loans offered by another federal agency
3. Acquisition of fixed assets or expansion of facilities
4. Payment of any debt that is directly related to the federal government such as SBA loans, unless it is an obligation by the Internal Revenue Service (IRS).
5. Paying any penalty as a result of noncompliance with the state, federal, regional or local laws.
There’s no doubt the EIDL loans play a big role in the lives of many people, especially business owners. However, some people do not understand how the loan program works or even how to put that money into good use. It is important to know when you can and cannot use an EIDL loan to avoid problems with the federal government.