What Happens if a Business Owner Cannot Repay an EIDL Loan?

The Economic Injury Disaster Loan (EIDL) program, administered by the U.S. Small Business Administration (SBA), was a lifeline for many businesses, providing crucial funds to help them survive economic hardships.  The SBA recently reversed course and is being more aggressive in pursuing repayment of these loans.  Many small business owners are finding it challenging to repay the EIDL loan.

The SBA Inspector General estimated that there were about $62 billion in past-due EIDL loans worth $100,000 or less as of March 2023.  Many business owners, when they applied, did not have a good understanding about whether they’d have to pay back the EIDL loans.  Their confusion isn’t unwarranted.  Until December 2023, the SBA’s policy was not to aggressively pursue repayment.  Congress put pressure on the SBA and it reversed course.  We’ve heard from several business owners who received unhappy repayment notices.  In such cases, understanding the consequences and potential solutions is vital. 

1. Impact on Credit Score

Failure to repay an EIDL loan can significantly impact the business owner's credit score. This can make it difficult to secure financing in the future and may also affect personal credit.

2. Collection Efforts

The SBA can employ various collection efforts to recover the outstanding loan amount. This can include contacting the borrower directly, sending demand letters, and even taking legal action.

3. Asset Seizure

If the loan is not repaid, the SBA may seek to seize assets pledged as collateral for the loan. This could include business assets such as equipment, inventory, or real estate.

4. Personal Liability

In some cases, business owners may be personally liable for repaying the EIDL loan. If you have defaulted on an EIDL loan of more than $200,000, your personal assets can be seized. That includes real property you pledged for security, the money in your personal bank account, investments, cars, and other personal assets.

5. Impact on Future Loans

Defaulting on an EIDL loan can make it challenging to secure financing in the future. Lenders may view the borrower as high-risk, making it harder to access credit when needed.

6. Bankruptcy

In some cases, filing for bankruptcy may be the only option for a business owner who cannot repay an EIDL loan. However, this should be considered as a last resort, as it can have long-lasting consequences.

It’s crucial for business owners to understand the implications of not repaying an EIDL loan. Seeking assistance from financial advisors or the SBA can help explore options and find a solution that works best for their situation. It is always advisable to communicate openly with lenders and seek guidance to avoid serious consequences.