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How You Can and Cannot Use Your EIDL Loan

How You Can and Cannot Use Your EIDL Loan
Susan Guillory

Susan Guillory

Updated September 13, 2021
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Editor’s note: At Lantern, we strive to help you make financial decisions with confidence. To do this, we occasionally feature content that includes information about our partners and their products or services. We do not provide, endorse, or guarantee any third-party product, service, information or recommendations—and our opinions are our own.
With the global pandemic still in full force, many U.S. companies are struggling to find the capital they need to stay afloat. And since it’s unclear how much longer the pandemic and the recession it sparked will last, many small business owners may be concerned about the future of their companies.The Small Business Administration (SBA) has stepped in to help with a loan program that can offer aid to businesses in need during the COVID-19 pandemic.

What Is the EIDL Loan Program?

The Economic Injury Disaster Loan (EIDL) program is a loan program guaranteed by the SBA. It’s available to small businesses, small agricultural cooperatives, and most private nonprofits in a disaster area that have suffered substantial economic damage. If a business isn’t able to meet its usual operating expenses due to a disaster and can’t get credit elsewhere, it may be eligible for an EIDL loan to see it through. The EIDL program isn’t new, though most business owners are aware of it because of COVID-19. Prior to this pandemic, the loan program offered low-interest loans to businesses and homeowners who were affected by natural disasters like wildfires, earthquakes, and hurricanes.Recently, however, the focus has been on providing relief to businesses impacted by the coronavirus. By June, 2020, more than 1.7 million EIDL loans had been approved, and that number continues to rise.Despite the loan’s popularity, small business owners may still have many questions about what they are and aren’t allowed to use EIDL loan funds for.If you’re thinking of applying for one of these loans, it’s important to understand EIDL loan terms and conditions so that you can ensure you’re compliant in your use of the funds.

What Does an EIDL Loan Look Like?

The government lays out clear limits for EIDL loans, and it’s helpful to be aware of what they are when you’re thinking about applying. The maximum amount you can receive for an EIDL loan is $2 million. As of Sept. 8, 2021, this includes COVID-19 EIDL loans. The maximum interest rate for an EIDL loan is 4%. Your first payment won’t come due for a year (two years for a COVID-19 EIDL loan) but interest will accrue. You can start paying down your loan earlier.And the maximum term (time during which you pay back the funds plus interest and fees) of an EIDL loan is 30 years. The amount you specifically may be eligible to receive and other terms will vary based on your situation. Collateral is required for loans of more than $25,000, and real estate is the preferred form of collateral..

EIDL Loan Rules

If you’re thinking of applying, it’s a good idea to research how to get an SBA loan to understand the general requirements and qualifications that the Small Business Administration has before applying for your EIDL loan. To qualify, your business must:
  • Be a business, agricultural enterprise, cooperative, Employee Stock Ownership Plan (ESOP), or tribal small business concern with 500 or fewer employees or a sole proprietorship or independent contractor or a small private nonprofit
  • Not be engaged in any illegal activity (as defined by Federal guidelines)
  • Not derive more than one-third of its gross annual revenue from legal gambling activities
  • Not be in the business of lobbying
  • Not be a state, local, or municipal government entity nor can you be a member of Congress.

What Can EIDL Loans Be Used for?

EIDL loan rules about what funds can be used for seem simple on the surface. But it’s important to understand them fully. Businesses can use loan proceeds for working capital or normal operating expenses. That includes:
  • Payroll
  • Health care benefits for employees
  • Rent 
  • Utilities
  • Fixed debt payments
  • Repairs
  • Replacing inventory.
Bear in mind that applicants will be required to verify that they’ll use the loan solely as working capital for EIDL-eligible expenses to alleviate economic injury caused by the disaster. The SBA recommends keeping your EIDL funds in a bank account separate from your other finances so you can more easily demonstrate how you used the funds.As of Sept. 8, 2021, COVID-19 EIDL loan uses have been expanded to include prepayment of commercial debt and payment of federal business debt.

EIDL Loan Use Restrictions

Typically, EIDL loans cannot be used for a number of purposes. These include:
  • Paying off old debts (see exception for COVID-19 EIDL loans noted in previous section)
  • Refinancing new debt
  • Buying capital assets, new construction, or vehicles
  • Dividends and bonuses
  • Disbursement to owners (unless for performance of services)
  • Repayment of stockholder or principal loans (with certain exceptions)
  • Paying a direct federal debt except for IRS debts (but again, see exception for COVID-19 EIDL loans)
If you’re unclear about a specific expense, you may want to get guidance from the SBA.

EIDL Loan Use for the Self-Employed

During the current pandemic, many sole proprietors of small businesses may also be wondering about whether you can get EIDL funds if you’re self-employed and what you can use them for?One concern they may have is establishing how much money they make. Many entrepreneurs don’t get a salary but take out a draw against net revenue instead. The SBA says that lenders can verify income using tax documents and bank statements in either case.And an EIDL loan for self-employed people may be used to cover the following, regardless of whether it’s for the self-employed person or for employees:
  • Wages, commissions, income, or net earnings (capped at $100,000 per employee)
  • Employee benefits (costs for vacation, family, or sick leave)
  • Insurance premiums
  • Retirement benefits
  • State and local taxes

If You’re Considering an EIDL Loan

Now that you know what the SBA EIDL loan can be used for, it’s time to consider whether the EIDL is for you.There are few small business loans that have terms as favorable as EIDL loan terms. Interest rates on the loans right now are 3.75%, and your repayment term can be up to 30 years. You don’t have to make a payment on your EIDL loan for one year from the date of note, and you’ll receive an amortization schedule once the loan is funded.You can apply for the EIDL program online. In the application, you’ll be asked information about your business, including its: 
  •  Employer Identification Number (or your Social Security number if you’re a sole proprietor)
  • Organization type
  • Gross revenues for 12 months before the pandemic
  • Cost of goods sold for 12 months before the pandemic
Applications take a minimum of 21 days to process. If you’re approved, the funds will be deposited in your bank account. If you are applying for a COVID-19 EIDL, note that the SBA will not consider applications for more than $500,000 until Oct. 8, 2021. 

Alternatives to the EIDL Loan

If you don’t want or don’t get approved for an EIDL loan (or if the program closes), you may still need capital to run your business while things are slow. You can take out emergency business loans, but know that you may pay a much higher interest rate for the convenience.There are other types of financing available that small business owners might consider, too, including:Some of these require a high credit score, while others may look more closely at your revenues than your credit. 

EIDL Could Help You Through Tough Times

The right answer to the question, “should I apply for the EIDL loan?” is really up to you. But for many businesses, the EIDL can be a once-in-a-lifetime opportunity to get financing with loan terms they might not otherwise qualify for. Of course, a loan is still debt, no matter how long you have to pay it off or what interest it charges. When you apply for the EIDL loan, there will be a hard pull on your credit report, and your score may drop a few points. It’s something to be aware of if you’re working on building your credit. However, if you make your monthly payments for the loan on time, that may help boost your credit over the longer term.If your business has struggled because of the pandemic, taking out an EIDL loan could provide the relief you need to make it through to better times. But there are also a lot of other options to choose from when you’re looking for small business financing. Whether you want to search for other SBA programs or discover online loan options, Lantern Credit lets you compare lenders with a simple application.
*To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.SOLC20089

Frequently Asked Questions

What can EIDL loans be used for?
Can I use EIDL funds to pay myself?
What can I spend my EIDL loan on?
Can I use EIDL loan money to pay credit card debt?
How much EIDL loan money can I get?
Can I use an EIDL loan to pay taxes?

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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