Why Your EIDL Loan Could Prevent You From Getting Another Business Loan

Many business owners took SBA EIDL loans during COVID without realizing the long-term consequences. These loans can block future financing, and what you can do about it.

The EIDL Program Created Unintended Consequences

In 2020, the Small Business Administration launched the Economic Injury Disaster Loan (EIDL) program to help small businesses survive the economic disruption caused by COVID-19. The program provided working capital to businesses experiencing temporary revenue losses due to shutdowns, restrictions, or reduced demand.

For many businesses that were truly struggling, the program provided important relief. But the EIDL program also created unintended consequences that many small business owners are only now beginning to discover.

A large number of EIDL loans were issued to businesses that ultimately did not experience meaningful or lasting economic injury. The funds were used for general spending, temporary cash flow relief, or even personal expenses that had little to do with stabilizing the business. Years later, those businesses have little to show for the borrowed money except the debt itself.

The Problem Most Borrowers Never Understood

EIDL loans are not unsecured personal obligations. They are secured by the business.

For loans above $25,000, the SBA filed a UCC-1 lien against the business assets, giving the federal government a senior secured position ahead of future lenders. Many borrowers were either unaware of this at the time or mistakenly believed the loan had no connection to their business operations.

What We See at Capital Resources

We review loan applications from insurance agency owners and financial advisors every day. A surprising number of applicants fail to disclose their EIDL loan entirely, believing it is unrelated to their business. When we run a UCC search, the SBA lien appears immediately.

The SBA already has a senior claim on their business assets. This can become a major obstacle when trying to secure additional financing.

Why EIDL Loans Block Future Borrowing

Most conventional lenders require a first-priority lien position when making a business loan. If the SBA already holds that position, a lender cannot move forward unless the SBA agrees to subordinate its lien.

If you want to borrow money to acquire another agency, buy a book of business, or expand your firm, the SBA must approve letting another lender move ahead of them. The process can become challenging.

The Reality of SBA Subordination

Borrowers assume they can simply request subordination from the SBA and move forward. The process is slow, inconsistent, and requires concessions from the borrower.

Based on our experience assisting clients, the SBA requires one of two outcomes:

• A meaningful pay-down of the EIDL balance
• A full payoff of the loan

Larger loans may qualify for subordination with a partial pay-down. Smaller loans are more commonly required to be paid off entirely. The exact threshold is not clearly defined and appears to vary from borrower to borrower.

The SBA asks the borrower to propose the pay-down amount themselves. Borrowers are allowed up to three offers. If none are accepted, the request will be denied.

The Subordination Process Requirements

Before a request can be submitted, borrowers must assemble a package that includes:

• A completed SBA subordination application
• A borrower authorization form
• A copy of the SBA UCC-1 financing statement
• A current UCC search confirming the SBA’s lien position
• A term sheet from the lender requesting subordination
• Proof of hazard insurance

Once submitted, responses take 7 to 10 business days just for the initial review. Additional requests for financial statements, tax returns, and letters of explanation are common.

From start to finish, borrowers should expect the process to take four weeks or longer. The process cannot even begin until they already have a lender willing to move forward contingent on SBA approval.

Moving Forward With Your EIDL Loan

At Capital Resources, we work with insurance agency owners and financial advisors who are navigating these challenges.

Solutions may include:

• Paying off the EIDL loan entirely
• Negotiating SBA subordination
• Structuring a refinance that eliminates the EIDL debt
• Planning future borrowing around the SBA lien

Understanding how the EIDL loan affects your business and planning ahead prevents it from becoming an obstacle to growth.

If you’re considering an acquisition, refinancing existing debt, or want to understand how your EIDL loan affects your borrowing options, our team can help guide you through the process.

Your EIDL loan doesn’t have to hold your business back.

Ready to discuss your options? Contact Capital Resources to learn how we can help you navigate EIDL subordination or structure financing that works around your existing SBA lien.

About Capital Resources

Since 2005, Capital Resources has provided specialized financing to insurance agency owners and financial advisors across the United States. With deep industry knowledge and approval processes built around commission-based revenue models, Capital Resources helps clients navigate complex financing challenges including SBA liens and EIDL subordination.