How to be sure your SBA EIDL Loan helps you do more than survive
Congratulations! At some point in the past year, you got one of those amazing loans from the Small Business Administration (or the SBA) to help your business make it through the shutdowns, slowdowns and upside-down world of the COVID-19 pandemic.
The SBA’s Economic Injury & Disaster Loan (or EIDL — yay for more government acronyms!) program was originally designed to help companies harmed by natural disasters like hurricanes, floods and tornadoes.
So, what did this mean COVID hit? Well, thankfully, it meant that the EIDL program was already in place and ready to take action when many businesses were forced to shut down for weeks or even months at a time due to the pandemic.
And as loan programs go, it's honestly a pretty easy one to qualify for.
Ready for even more juicy details on the SBA and your EIDL?
In total, the SBA has lent over 200 billion dollars in small business disaster loans to more than 3.5 million businesses.
And it will ALL be paid back over the next 30 years...with interest.
Unless, of course, the businesses given these loans default, go broke, or declare bankruptcy. (Don’t worry, I’m here to support you in avoiding all of these things in YOUR small business!)
At first, the companies who took EIDL funds had 12 months with no payments due. Then, this no-payment period was then extended to either 18 or 24 months depending on when you took the loan.
Regardless of when you took the loan though, your interest costs have already started to build up...and will continue to grow for as long as you have the loan.
The fact that it was so easy to qualify for an EIDL coupled with the knowledge that this small business disaster loan is NOT forgivable (like the PPP loans were) makes me a bit concerned.
I know many companies (maybe yours included) that took the funds and spent them to keep their business afloat during some very bad situations, BUT they don’t actually have a plan for how to increase revenue or profit to cover the loan payments in the long run.
If that sounds like you, here are a few things to consider.
The Skinny on Business Debt
Good Debt vs. Bad Debt
Good debt is money that helps your business grow and where the benefit (i.e. the revenue increase or the cost savings) is significantly greater than the original cost of the loan.
Bad debt comes from loans where the cash drain from paying back the loan makes it hard or impossible to invest in your business… or worse, makes it hard to even pay your other bills.
In general, I have two “rules of the road” I recommend to business owners who are thinking about taking on debt that can help you tell the good business debt from the bad.
My Rules for Business Debt
Rule #1: If you don’t understand how much the loan will cost you to pay back — DO NOT TAKE THE LOAN. It is guaranteed to hurt you in the long run!
Rule #2: If you’re not sure how you will use the money and/or you don’t see how your business will get a financial benefit from the loan then, either you’re not ready OR the loan terms are not the right for your business.
So, here’s the real sticking point...
How do you know if the financial benefit you will get is worth the cost of the loan?
That’s where a simple Return on Investment (or ROI — another acronym! You’re welcome.) analysis will help!
What’s ROI?
ROI is expressed as a percentage and is calculated by dividing an investment's net profit (or loss) by its initial cost or outlay. (Thanks, Investopedia!)
Let’s break that down a bit further though...
To calculate ROI you have to know:
What will the net profit (or loss) be from taking on this business debt? In other words, you have to know what you will invest the money in, what your increase in revenue (or cost savings) will be, and what your net profit from that will be.
What are the costs of capital? For the EIDL loans, this means you have to know how long you plan to take to pay it back...because the longer you take to repay the loan, the more interest you will pay. (In this case, 3.75% per year.)
Here's an example:
Let’s say your loan = $100K.
If you start with 1 year of no payments, the loan will cost you $3,750 in interest for that first year.
Then, if you pay off the loan over the next 29 years following those first 12 months, you’ll pay a total of $66,500 in interest on top of the $100,000 (your initial loan amount). Payments on this debt payment schedule will total $490 per month.
However, if you choose to pay off the loan after 16 years, you would only pay $32,000 in interest. Sounds a lot better, right? BUT your monthly loan payments on this debt payment schedule will be $734 per month.
To get a 100% return on your EIDL, you would have to generate twice as much profit as you will pay in interest costs.
Meaning...over the 16 year payment period, you’d have to generate $165,000 in additional profit (aka more than you would have otherwise) to get your return on investment. For the 30 years scenario, you’d have to generate $223,000 in profit to make the same ROI.
Granted, 16 or 30 years is a long timeframe, so it's certainly not too high a goal. But from what I've seen, it's way too easy to assume that a loan is good and cheap during a bad stretch in your business.
And without a solid strategy for actually getting a financial benefit from the loan (beyond simply surviving), it will be very hard to look back and be sure you’ve made the best use of the money you went into debt for.
Need more support navigating your small business disaster loans or money decisions for your business in general?
Let’s Talk - I have a new EIDL Cost Calculator. You can use it to check out the monthly payments and total interest costs on your loan by adjusting the length of time you take to repay the loan. Hopefully, this will help you find a payment plan that works for you!
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