EIDL Loans and Other SBA Disaster Loans

The Small Business Administration (SBA) approved over $390 billion in COVID-19 Economic Injury Disaster Loans (EIDLs) to help small businesses during the pandemic. This was an SBA disaster loan, and COVID-19 EIDL loans are low-interest loans with a 30 year repayment period. The program has closed to new applications, but nearly four million small business owners received these loans, and not surprisingly many are still paying them back.

Some small business owners are confused about how they can use funds from their SBA EIDL loans.

As one applicant commented on the Nav blog: 

“So much information available on what NOT to use EIDL funds for, but I’ve yet to find a detailed list of what funds CAN be used for.”

And another asked: 

“It’s very vague on what I can use it for. Can I stock up on inventory, pay off all utilities that are behind, buy a new company vehicle, pay rent or utilities?”Let’s explore how to use these funds correctly, how to manage them responsibly, and other questions surrounding EIDL loans.

Let’s explore how to use these funds correctly, how to manage them responsibly, and other questions surrounding EIDL loans.

What we’ll cover

Many business owners, including the sole proprietors and independent contractors who got these loans, have never used a government loan program like this before and are worried about the possible consequences of using their EIDL funds incorrectly. They also correctly observe that the guidance isn’t exactly crystal clear, and is especially confusing for independent contractors and the self-employed who may have limited knowledge of small business accounting and terms like working capital that are often associated with financial statements. 

Questions we’ll tackle here include whether you can use EIDL to:

1. Pay yourself
2. Pay debt
3. Buy a vehicle or home
4. Start a new business
5. Pay rent or mortgages

We’ll also discuss how long you have to use the loan proceeds, what documentation you must keep and what to do if you want to return it. 

Keep in mind we will share and discuss guidance from the SBA here but we can’t and don’t speak for them. Do not rely on this article for specific information on how to properly spend your EIDL funds.

If you have questions about using your loan proceeds, we recommend you ask the SBA. You can also get free assistance by contacting the SBA Disaster hotline, your regional SBA office, your Small Business Development Center (SBDC) and/or SCORE. (Locate your local office at SBA.gov.) You can also talk with your legal or financial advisors.

What exactly can I use EIDL funds for?

The SBA states that SBA COVID-19 EIDL loan funds may be used for:

“Working capital to make regular payments for operating expenses, including payroll, rent/mortgage, utilities, and other ordinary business expenses, and to pay business debt incurred at any time (past, present, or future).”

While the SBA published some guidance describing how EIDL proceeds may be used (and has updated that over time), it never published a guide for business owners describing how to use EIDL loans. The guidance the SBA did release was rather broad and it did not spell out every situation.

If you really want to understand these loans, you have to look at the history of this program.

EIDL loans weren’t created just for the coronavirus economic crisis. In fact, they’ve been part of the SBA’s Disaster Loan program for many years. Disaster loans often make national headlines when a natural disaster hits an area, like when Hurricane Ian destroyed part of Florida. So before we dive into specific questions, let’s look at how these loans were designed to be used.

According to the Standard Operating Procedures for Disaster Loans (SOP 50 39) (which predates the COVID-19 crisis): 

“Economic Injury (EI) is a change in the financial condition of a small business concern, small agricultural cooperative, small aquaculture enterprise, or PNP of any size (excluding religious organizations) attributable to the effect of a specific disaster, resulting in the inability of the concern to meet its obligations as they mature, or to pay ordinary and necessary operating expenses. (Note: the SBA opened up EIDL to religious organizations impacted by coronavirus.) 

Economic injury may be reduced working capital, increased expenses, cash shortage due to frozen inventory or receivables, accelerated debt, etc. “Economic injury loan proceeds can only be used for working capital necessary to carry the concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury (emphasis added).” 

Many small business owners aren’t familiar with the term “working capital,” though, and as a result they find that description confusing. We were unable to find an official SBA definition of working capital, but generally, working capital loans are generally used to pay day-to-day expenses of the business. These might include salaries, inventory, rent, utilities, and short-term debt or long-term debt payments, for example. (Again this isn’t an official SBA definition.) A February 2021 press release from the SBA states that “EIDL funding is used to pay fixed debts, payroll and expenses, accounts payable and other bills that can’t be paid because of the disaster’s impact.”

While there is no comprehensive list of how EIDL funds may be used, if you’re trying to err on the side of caution, there are clues in the section of the SOP that describes how to calculate economic injury. (Keep in mind that with EIDL, the borrower doesn’t ask for a specific loan amount; instead the SBA will calculate it based on its formulas for determining economic injury.) The following examples come from the section of the SOP (page 186-187, abbreviated here) that relates to calculating economic injury: 

“To-date needs are normal obligations already incurred (usually reflected as liabilities on the most recent available post-disaster balance sheet), which the business is presently unable to pay as a result of the disaster. They include funds necessary to bring delinquencies current and to restore working capital to normal levels (emphasis added)…

Future needs are normal obligations, which the business would not be able to meet throughout the remainder of the injury period. They will sometimes be a continuation of to-date needs, such as: (1) Fixed debt payments necessary to maintain the current status of long term debts; or (2) Payments of ongoing fixed expenses such as rent; utilities; insurance premiums; or the owner’s draw/salary when the draw is both normal and essential… 

Extraordinary items are needs outside of normal operations and directly caused by the disaster. Extraordinary items can include: (1) Temporary rent or storage fees, additional advertising costs, etc.; (2) Accelerated debt due to the disaster; (3) Inventory replacement may be an extraordinary item. 

For example, in the spring, a clothing store located in a disaster area is left with an inventory of winter clothing and has no funds to order summer stock. The cost of ordering summer inventory represents an additional need.”

Ineligible use of EIDL funds / What you cannot use EIDL on

There are some ways that you clearly cannot use disaster loan proceeds and these are included under the section that includes ineligible use of proceeds:  

“EIDL proceeds may not be used for: 

1. Payment of any dividends or bonuses; 
2. Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant;
3. Repayment of stockholder/principal loans, except when the funds were injected on an interim basis as a result of the disaster and non-repayment would cause undue hardship to the stockholder/principal; 
4. Expansion of facilities or acquisition of fixed assets; 
5. Repair or replacement of physical damages; 
6. Refinancing long term debt (SBA later made an exception here; see that change described below)) 
7. Paying down (including regular installment payments) or paying off loans provided, or owned by another Federal agency (including SBA) or a Small Business Investment Company licensed under the Small Business Investment Act. Federal Deposit Insurance Corporation (FDIC) is not considered a Federal agency for this purpose; 
8. Payment of any part of a direct Federal debt, (including SBA loans) except IRS obligations. (Note: There is an entire section that goes into more detail on paying federal debts. If you want to use EIDL proceeds that way, refer to page 75 of the SOP.) 
9. Pay any penalty resulting from noncompliance with a law, regulation or order of a Federal, state, regional, or local agency. 
10. Contractor malfeasance; and 
11. Relocation”

The SBA made changes effective September 8, 2021 that allowed EIDL to be used to pay many debts. See question 2 below for more details.

With that background in mind, let’s explore specific questions we’ve received around the use of EIDL funds. 

1. Can I use EIDL funds to pay myself?

Paying yourself from EIDL funds is a source of confusion for some. The business owner who posed the following question says she hadn’t paid herself a set salary in the past and is unsure how to compensate herself using EIDL funds: 

“Can it be used to pay myself weekly if we never paid ourselves, but transferred funds from the business account to pay personal stuff if needed. How would I calculate?” 

Another one asks: 

“I’m wondering if there is a limit on how much we can ‘repay’ ourselves with this loan for lost wages?”

It seems clear you can’t pay yourself unless it’s for work you do in your business. After all, the SOP states that EIDL can’t be used to pay: “Disbursements to owners, partners, officers, directors, or stockholders, except when directly related to performance of services for the benefit of the applicant.” 

But if you continue to work in your business, paying yourself for the work in the business appears to be a reasonable use of these funds. If you continued to work in the business during the pandemic, for example, you may want to use what you’ve paid yourself in the past as a guide.

For those who don’t pay themselves a salary, you may want to look at what you have taken out in the past as owner’s draw, disbursements, or as profits. (All of these must be related to work you’re doing for the business.) Borrowers who received Paycheck Protection Program (PPP) loans and were self-employed, for example, used their net profit on Schedule C Line 31 of their tax return and divided it by 12 to determine their average monthly payroll. (Later the SBA allowed self-employed borrowers to qualify based on gross revenue, instead of net profit.) It’s reasonable to assume that formula could be used to calculate owner’s compensation for EIDL as well. 

Another business owner asks about paying themselves while their business is closed: 

“We were approved, have no employees. Just a small cleaning business. We have lost income to ourselves as no one is wanting us in their house to clean. Can $ be used to pay us what we normally would have made?” 

The type of work you do to earn your pay does not appear to be restricted. If your business is physically closed, maybe you can take this time to work on your website, accounting, social media advertising campaigns, marketing etc. to help your business stay afloat as you wait to resume normal business functions.

Verdict: Yes, but only for working in your business

2. Can I use EIDL to pay off debt?

COVID-19 EIDLs carry a 3.75% interest rate (2.75% for nonprofit organizations) which makes it less expensive than other types of unsecured small business financing available. These low rates have led many to ask whether they can use these funds to pay down or refinance other small business loans.

“Can it be used for charges put on high interest credit cards from when the pandemic started? Would we total the charges in that time frame and pay it from the EIDL?

Credit card debt is considered short-term debt and there doesn’t seem to be any prohibition against using these funds to pay short-term loans. (Keep in mind you should only use EIDL funds for business purposes, such as paying off business credit cards, and not to pay off personal credit card debt.)

In the past, SBA guidelines appeared to prohibit paying off or refinancing long-term debt with EIDL proceeds. That changed.

Good news! The SBA announced September 8, 2021 that it expanded the allowable use of funds to include paying most debts, specifically:

…SBA is revising the regulation at 13 CFR 123.303, “How can my business spend my economic injury disaster loan?”, to permit COVID EIDL working capital loan proceeds to be used to pay any type of business debt, including loans owned by a Federal agency (including SBA) or an SBIC. SBA also is revising the regulation to clarify that COVID EIDL loan proceeds may be used to make debt payments including monthly payments, payments of deferred interest, and pre-payments, except that prepayments will not be permitted on debt that is owned by a Federal agency (including SBA) or an SBIC.

Verdict: Yes, except to prepay certain federal debts

3. Can I use EIDL to start a new business?

We received questions from entrepreneurs whose businesses were not likely to survive the pandemic downturn and wanted to know if they can use funds from one of these loans to start something new:

“I am an Uber driver and I got approved for an EIDL loan. Can I use it to switch business industries and start new business?”

That does not appear to be an acceptable use of EIDL funds based on the definition we discussed earlier: “Economic injury loan proceeds can only be used for working capital necessary to carry the concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury.” In addition, if relocation is an ineligible use for an existing business, it’s doubtful that starting a brand new business would be considered acceptable use. Check with an advisor before you go this route. 

Verdict: Not likely

4. Can EIDL be used to buy a vehicle or home?

One Uber driver who says they were approved for a $45,000 EIDL wanted to know if it’s OK to use that money to buy a home. Another wrote:  

“I am an Uber driver (independent contractor) and received a $41,000 EIDL loan as an independent contractor. Can I use EIDL to buy a vehicle for driving Uber because it is my only source of income for the last 3 years?” 

First, buying a home clearly falls outside the intended uses of EIDL. It appears that buying a vehicle does as well, even if it is a business purchase. Remember that ineligible uses of EIDL proceeds include “acquisition of fixed assets” and fixed assets usually include vehicles. 

Verdict: Not likely

5. Can an EIDL cover my rent/mortgage?

One reader asks whether EIDL can be used to pay “shop rent” and that seems to be a very reasonable use of working capital funds. Similarly, paying the mortgage on your commercial property or even a rental property may be acceptable as these fall under  “fixed debt payments necessary to maintain the current status of long term debts.”

On the other hand, a reader who works from home wants to know if it’s acceptable to use EIDL to pay rent. “Would this also apply to a private live/work condo mortgage?” they asked. Since that’s a combination of personal and business expenses, we’d recommend getting professional advice before using EIDL that way. 

Verdict: Yes, likely if used for business expenses

Is There a deadline to spend EIDL funds? 

Several readers have asked whether they have to spend EIDL funds within a certain period of time. 

“Frankly, I don’t have an immediate way to spend the funds I received. Is there a legal way to place the funds in a retirement account? If I want to return the EIDL funds, can I legally let them sit in a brokerage account for a year before the payments start?” 

Remember, earlier we pointed out that the SOP states: “Economic injury loan proceeds can only be used for working capital necessary to carry the concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury.” 

The COVID-19 economic crisis is still creating problems for some businesses. It seems reasonable that business owners may continue to use those funds for as long as the crisis continues to impact their operations. That may be for months, a year, or even longer, depending on a number of factors. 

A report from the Office of the Inspector General found that in previous disasters some borrowed from the EIDL program when they really didn’t need it. A business that does not experience economic injury may want to consider returning the funds. There is no prepayment penalty.

What’s best practice for tracking the use of my EIDL funds? 

There is also confusion about documentation required. 

“I’m self employed…and it says show receipts, do we just save our receipts and turn them in at some point?”

You don’t turn in documentation automatically but you should keep careful track of how you spend EIDL proceeds in case the SBA or another governmental agency asks to review that information in the future. Just as there have been audits and inspections of past disasters, there will be scrutiny of some of these loans as well.

If you use accounting software, you can put a note “EIDL” on those expenditures and keep a file or attach receipts. If you don’t use an accounting program it’s a good idea to keep a spreadsheet listing how you spent these funds. It can also be helpful to keep these funds in a separate business bank account for tracking purposes.

What other grants and funds are available in 2024 for small businesses?

If you’re looking for other grants or funding to cover your business’s financial obligations but aren’t sure where to start, check out Nav’s comprehensive guide to small business grants in 2024. We cover which companies, foundations, and U.S. government agencies are giving business grants this year.

You’ll also learn about resources to search for other grants that fit your business as well as how to apply when you pick the grants that will work for you.

Frequently asked questions about ways to use an EIDL loan

• Is an EIDL loan worth getting?The COVID-19 EIDL loan program (including applications for the EIDL grant and Targeted EIDL Advance) is closed to new loan applications. The SBA is also no longer accepting reconsideration applications. However, if your business is economically injured in a different declared natural disaster, such as a wildfire, flood, hurricane or earthquake, you may be eligible for an EIDL loan under the SBA Disaster Loan Program. Learn more about Disaster Loan eligibility here.
• Can I put my EIDL loan in a savings account?The SBA’s published guidance did not address this question. One attorney reported that when he asked the SBA this question, he was told the funds could not be deposited into an interest-bearing savings account. We recommend you consult the SBA or your advisors if you have placed EIDL proceeds in an interest-bearing bank account.
• How Long Does It Take For EIDL Loan To Fund?The COVID-19 pandemic was an unprecedented, nationwide disaster. As such, processing times for these loans took much longer than usual. Some loan applications took months to process. In a smaller, more local disaster, EIDL program loans may fund in a matter of weeks.
• Can I Use EIDL to Invest in Real Estate?Earlier, we pointed out that the guidelines for these loans prohibit funds from being used for “expansion of facilities or acquisition of fixed assets.” Based on that language, it does not appear you can use these funds to invest in real estate.
• How does a business apply for a disaster loan?Businesses can apply for a disaster loan through the U.S. Small Business Administration (SBA) in the event of a declared disaster. The first step is to visit the SBA’s official website and complete the necessary application forms, which typically include details about the business, its owners, and the extent of the disaster-related damages. The SBA evaluates the application, and if approved, the business can access low-interest loans to help recover from the disaster’s impact.
• What is the latest news on EIDL funds?According to the SBA’s website: “As of May 6, 2022, SBA is no longer processing COVID-19 EIDL loan increase requests or requests for reconsideration of previously declined loan applications due to a lack of available funding.”
• What happens to EIDL loan if business closes down?According to the Congressional Research Service, a borrower must pay back the loan with personal assets unless the debt is dissolved in a bankruptcy.
• What happens if you can’t pay back the EIDL loan?If you’re facing financial hardship, the SBA is offering a Hardship Accommodation Plan, as well as financial counseling resources to help you figure out a way to repay the loan. Check with the SBA for additional information.