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Can an EIDL loan be transferred in a business sale?

By Mainshares

Sep 18, 2023

As part of the federal government’s fight against the COVID pandemic, the SBA launched the COVID Economic Injury Disaster Loan (EIDL) program. Over the course of 2020 and 2021, the SBA disbursed $390B in loans to almost 4 million SMBs and non-profits.

Many businesses who received these loans still have principal outstanding, which brings up the conversation with entrepreneurs considering purchasing these small businesses. 

Why was the EIDL loan so popular?

In short, it was cheap money. The loan amounts maxed at around $2M and were earmarked as working capital to “alleviate economic injury caused by disaster occurring in the month of January 31, 2020 and continuing thereafter.”

The terms of the loan were incredibly business-friendly. Rates were as low as 3% (compared to 11% at the time of this writing) and only on the funds actually advanced. 

Borrowers were also given a window during which no payments were due, a deferred payment period. This window ranged from 12 to 30 months. After that, the loan was often amortized over 30 years!

What happens to an EIDL loan during a business sale?

With many owners having EIDL loans outstanding, they may try to suggest that a business buyer assume the terms of the EIDL loan as part of the deal.

After all, the interest rate is pretty low, which would make them a very cheap source of “financing” for a business buyer. 

For example, if a business buyer needed $1M of debt financing, today’s SBA rates would mean a monthly payment of around $13.7K. If a business buyer were able to use a $500K outstanding EIDL loan and only take out an SBA 7(a) loan for $500K, they could save almost $5K in debt payments for the first 10 years.

Interest savings from EIDL loan assumption

The issue lies in the terms of the EIDL loan docs: Borrower will not sell or transfer any collateral (except normal inventory turnover in the ordinary course of business) described in the "Collateral" paragraph hereof without the prior written consent of SBA.

What do the experts say?

We reached out to Joe McAleer from Multifunding to ask him if he’s seen successful instances of buyers assuming an outstanding EIDL loan. Here’s what he had to say:

"We’ve been asked this a lot. We’ve never seen the SBA allow it to be transferred when a business is sold.  It was intended as a disaster loan and most businesses took advantage of its very favorable terms. Thus, the SBA wants their money back when the business changes hands.

The SBA is more keen on allowing the EIDL to be transferred in an instance of hardship. But most business sales, especially those that are facilitated with an SBA (7A) loan are purely for the current owner's benefit.  It isn't considered a hardship when a business is healthy and saleable so therefore the SBA will always want this loan satisfied/paid."

In short, EIDL loans aren’t likely eligible for a business buyer to assume and will need to be repaid when selling a business.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.

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