COVID Relief: How You Can (& Can’t) Use Your Economic Injury Disaster Loan & Advance

If you’re a small business owner, odds are you’ve been impacted in some way by the COVID-19 pandemic. And if that impact has been huge? You’re definitely not alone. Small business owners around the world have been hit hard, with many struggling to keep their businesses afloat. Fortunately, there are a few financial opportunities available to help you through these difficult times. One that you may have already heard of is the Small Business Administration’s Economic Injury Disaster Loan (EIDL).

The EIDL is a low-interest, long-term loan for small business owners that have been impacted by COVID. These loans offer low, fixed rates and repayment terms up to 30 years. Businesses with fewer than 500 employees, certain nonprofits, and agricultural businesses can apply and be approved if they meet all criteria set by the SBA.

One of the most common questions we’ve come across is how EIDL funds can be used. The good news is that there are limited restrictions on the usage of these loans. While most of your operational expenses will be covered, though, there are a few restrictions. Whether you’re still waiting to apply for your loan or your funds just hit your bank account, keep reading to learn more about how you can — and how you can’t — spend your EIDL funds.

What EIDL Loans Can Be Used For

The great thing about EIDLs is that there are very few restrictions on how funds are spent. According to the SBA, funds should be used for “financial obligations and operating expenses that could have been met had the disaster not occurred.”

What does this mean? Quite simply, it means that your day-to-day operating expenses can be covered using EIDL funds. EIDL funds are meant to help you keep your business doors open following a disaster. These loans help fill the gaps in income caused by a disaster (such as the COVID-19 pandemic) and serve as working capital to help your businesses be successful despite the challenges that come following such a disaster.

Let’s take a more specific look at how your EIDL funds can be spent. Qualifying expenses that can be covered using an EIDL include:

• Working capital
• Rent
• Utilities
• Payroll expenses
• Fixed debt payments
• Health care benefits
• Supplies
• Inventory
• Marketing & advertising
• Accounting & bookkeeping services
• IRS tax payments

You can use funds to pay yourself but only for work that you are doing within the business — dividends, for example, are not covered.

It should also be noted that there are further restrictions on how funds are spent if you also received a Paycheck Protection Program (PPP) loan. We’ll dive deeper into these restrictions later in this post.

Regardless of how funds are spent, make sure that you are keeping accurate records. The easiest way to do this is by using a business bank account and tracking expenses in accounting software.

Using Your Loan VS Advance

Many small business owners took advantage of the EIDL Advance, a grant of up to $10,000 that does not have to be repaid. If you received an EIDL Advance, funds can be used in the same way that EIDL funds can be used — as working capital or to cover operating expenses.

Using EIDL Funds When You Also Have A PPP Loan

Now, what happens if you have received an EIDL as well as a Paycheck Protection Program Loan (PPL)? This is where things can get confusing — so let me reiterate the importance of tracking how funds are spent.

PPP loans are far more restricted in how they are spent if borrowers want to have their loans fully forgiven. Small business owners that received PPP loans receive loan forgiveness by spending funds on these qualified expenses:

• Payroll expenses
• Rent or lease
• Mortgage interest
• Utilities

Now, how does this impact how you spend your EIDL funds? The caveat for borrowers that received both the PPP loan and the EIDL is that funds can not be used for the same purpose. For example, if you received both loans and spent your PPP funds on payroll expenses, you can’t also use your EIDL funds for these same expenses during your eight- or 24-week PPP covered period. The same rule applies if you received the EIDL Advance.

How You Can’t Use Your EIDL

While there are numerous ways to spend your EIDL funds, there are a few restrictions as outlined by the SBA. Let’s take a look at the straightforward restrictions, then look at a few that are a little more complicated. You are restricted from using your EIDL funds for the following purposes:

• Dividends & bonuses
• Acquiring fixed assets
• Expansions
• Refinancing long-term debt
• Repairing or replacing physical damage
• Relocation
• Paying penalties from non-compliance with a government law or regulation

Other restrictions for EIDL funds are:

• Disbursements: EIDL funds can’t be used to pay disbursements to owners, officers, partners, directors, or stockholders. The only exception is when disbursements are related to services or performances that are performed for the benefit of the borrower. For instance, an owner that draws a salary if work is performed within the business can be paid a salary from EIDL funds.
• Stockholder/Principal Loan Payments: The SBA restricts borrowers from repaying stockholder and principal loans. The only exception is when the funds were disbursed on an interim basis because of the disaster. It must also be shown that the non-payment of the loan would result in undue hardship on the stockholder or principal.
• Direct Federal Debt: EIDL funds can not be used to repay direct federal debt, including SBA loans.
• Loans Owned By Federal Agencies: Your EIDL funds can’t be used to make installment payments, pay down, or pay off any loan owned by a federal agency. This includes the SBA and any Small Business Investment Company licensed under the Small Business Investment Act.

FAQS About How To Use An EIDL Loan

More On COVID Relief For Small Businesses

Looking for other COVID relief options for your small business? Merchant Maverick has you covered! We’ve taken the time to research a variety of options to help you during this difficult financial time with our coronavirus resource center. There are a number of resources available to help your business during this critical time, so take the time to learn more about these resources. Good luck and stay safe!