Applications are being accepted for the Economic Injury Disaster Loan (EIDL) program once more. The EIDL is by far the best loan you can get if COVID-19 has had a negative impact on your company’s ability to raise additional capital.
But there has been a lot of misunderstanding regarding the EIDL’s collateral requirements. Using SBA presentations, operating guidelines, and FAQs as our foundation, here is what we know about EIDL collateral.
We advise getting in touch with the SBA if you have specific inquiries about your EIDL.
What is collateral, exactly?
Things (assets) that your company owns and pledges to a lender as a deposit on a loan are referred to as collateral. The ownership of the assets will transfer from your company to the lender if for some reason your business is unable to repay the loan.
For instance, if your car is used as collateral, the SBA may seize it if you default on your loan payments.
What loan amounts require collateral?
EIDL loans under $25,000 are regarded as “unsecured” loans and don’t need any security. EIDL loans over $25,000 will require collateral.
The SBA files a general UCC-1 lien against your company to secure the collateral. The lien will be filed with the relevant government agencies for a handling fee of $100. The borrower will be in charge of recording the real estate lien and paying the related fees for loans greater than $500,000
What is a UCC-1 lien?
A Universal Commercial Code (UCC-1) lien is a formal declaration that a creditor or lender, in this case the SBA, has an interest in the property of your company. The lien is a general statement that will cover every piece of company property, including inventory, machinery, and bank accounts.
Is it bad to have a lien?
Not necessarily. Businesses that have taken out loans to support their operations frequently experience liens. The lender’s interests are protected by a lien because they do want their money back. The SBA would only need to sue you and obtain a levy (the legal process of taking ownership of property) on your assets if you had rejected a lien and defaulted on your loan, adding extra work for everyone.
Additionally, the lien safeguards taxpayers from fraudulent loans because the government is the lender in this case. A lien prevents business owners from simply taking the EIDL, shutting down their operation, and launching a completely new business.
Is it okay to have more than one lien?
Yes, having multiple liens on a business is fine.
When will a personal guarantee be required?
Personal guarantees are needed for loans over $200,000 in addition to the UCC-1 lien. If the business defaults on the loan, the person providing the personal guarantee agrees to be personally liable.
What if I don’t have enough collateral?
The SBA won’t reject a loan just because there isn’t enough collateral You’ll need to pledge whatever collateral you do have available.
The SBA has publicly pledged to use reasonable efforts to collaborate with you to reach a favorable decision while taking the effects of COVID-19 into consideration.
This article shouldn’t be construed as advice on any legal, business, or tax matters and should only be used for informational purposes. Regarding the topics mentioned in this post, each person should speak with their own attorney, business advisor, or tax advisor. Bench disclaims all responsibility for decisions made based on this information.
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FAQ
What happens if you don’t pay back EIDL loan?
The lender will first ask the company for payment of the remaining loan balance. However, the lender will foreclose on the business’s pledged collateral if the borrower is unable to make the full payment. Your business assets may not have much value. In that case, the lender will abandon the collateral.
Do you have to personally guarantee an EIDL loan?
6. The SBA has waived any personal guarantee on advances and loans under $200,000, so do I need to provide one for an EIDL? Personal guarantees may be required by the SBA for loans exceeding $200,000
What happens if you default on a EIDL loan?
Be aware that if you don’t pay back your loan in full, you might not be able to borrow money from any federal institutions in the future.
Can you go to jail for EIDL loan?
Potential Penalties for Misusing EIDL Funds These offenses can result in sentences of up to 30 years in prison and fines of $1,000,000, in addition to five years in federal prison.