With the implementation of a significant IT upgrade two weeks ago, the Small Business Administration (SBA) has suddenly gone from processing just 900 disaster loan applications per day, to over 10,000 per day. Given the fact that millions of small businesses have applied for these loans and are desperately in need of these funds in order to simply stay in existence during the COVID-19 recession, this will be welcome news for these small businesses.

However, these loans come with a LOT of strings attached. As their professional advisor, it behooves you to have an understanding of these loan conditions, some of which are quite draconian. This will help you to help your clients make a wise decision about accepting this loan or not, and if they do, how to properly utilize the funds.

This should probably be a CPE webinar, but due to other projects I’m working on this week, this blog post will need to suffice.

There are three main things that I want you, as a tax professional, to be aware of on behalf of your clients in relation to the Economic Injury Disaster Loans:

1. The terms of the loan agreement.
2. Restrictions on use of proceeds.
3. The realization that this may be a once in a lifetime opportunity to “refinance” IRS tax debt into a 30 year, fixed rate loan at 3.75%.

Let’s briefly address each of these items.

EIDL Loan Terms and Conditions

SBA Form 1391 is the loan agreement for an Economic Injury Disaster Loan, and spells out the terms and conditions of the loan. Their are two very important things to understand about this loan agreement.

First, on loans in excess of $25,000, the SBA will secure their loan position with a general lien against all the business’ assets. This collateral for the loan is secured by use of a UCC-1, which will be filed in the county in which the business is located. The SBA deducts a $100 fee from the loan proceeds in order to cover the preparation and filing of the UCC-1. When I say that this lien covers all assets, I do mean all. It operates very similarly to a federal tax lien, and covers all property, rights to property, and property that may be acquired in the future. Heck, it even includes intangible intellectual property that the business may create in the future. It’s a very broad lien.

This may make it very difficult … Continue reading