Should You Take the SBA's EIDL Offer?Submitted by Mission Financial Planning on June 26th, 2020
Those who applied for the $10,000 EIDL Advance several months ago are receiving their SBA offers of the official EIDL loan and aren’t sure whether they should take it.
The loan is a 30-year, 3.75% loan with a 30-year term, for the purpose of helping small businesses through crises. EIDL loans have been around for years, usually for natural disasters, but this time it’s for the COVID-related economic losses small businesses have been experiencing. The EIDL loan documentation does not specifically itemize how you can use the money, but it's important to know that the allowable uses of the EIDL money are limited. Generally speaking, they can be used to pay for day-to-day operating expenses that you would have otherwise been able to pay in the absence of the crisis.
A lot of dentists initially applied for EIDL loans thinking they would pay off loans, refinance or upgrade the office/equipment, but the restrictions on the use of EIDL funds will keep that from happening.
While you can’t pay off loans, you can use EIDL money as working capital to pay ordinary and necessary expenses, such as payroll, rent, accounts payable, fixed debt payments (e.g., building mortgage or equipment and vehicle leases), and other bills.
I get a lot of questions about whether you can use EIDL money to pay off credit card bills. It depends. If credit cards were used for working capital needs on an emergency basis, you can use the EIDL proceeds to pay off the portion of the credit card debt that was used for emergency purposes as a result of COVID. It would be important to document this if you plan on paying off large credit card balances with your EIDL loan.
The EIDL loan cannot be used to expand or repair, improve the business, relocate, refinance existing debt or buy new equipment.
You also need to be careful with certain types of compensation: bonuses, dividends, disbursements to owners (other than for the performance of services), and the payment of outstanding shareholder loans are not EIDL eligible expenses.
Will an EIDL loan be helpful for your dental practice?
For the most part, dentists came through the shutdown looking OK – PPP helped them ramp back up as practices reopened. Assuming your practice gets back to a reasonable and consistent collection level, revenues cover expenses and your compensation, and you have a sufficient emergency/operating account, you probably don’t need the EIDL loan, at least not now.
Some dentists have decided to take the EIDL loan to have in their back pocket in case they have to shut the office for COVID again (mandated, or because of staff or doctor illness) to cover operating expenses during that or other difficult times that may result from COVID. Orthodontists may suffer for a while because they missed several months of new starts. Dentists may have a lull 6 months from now because patients that missed appointments during the shutdown also missed being rescheduled for their 6-month recall. While the EIDL loan is not free money, it may be worth taking and maintaining the loan until we’re COVID-free just for peace of mind.
Schedule a time to talk through whether an EIDL loan would be useful in your practice.