Should you pay back your EIDL early?

If you took out an EIDL last year, you now have 24 months from the original date of the loan to pay it


You now have more time to pay off economic injury disaster loans. Even if you’re not using the money, it might still be a good idea to wait to pay it off. Here’s why.

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The CARES Act helped many businesses make it through the pandemic by offering economic injury disaster loans (EIDL) in addition to the Paycheck Protection Program. Under a new decision by the Small Business Administration (SBA), loans made in 2020 will not come due until 24 months from the date of the loan. Previously it was 12 months.

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For loans made in 2021, the initial payments are due in 18 months from the date of the loan, up from 12 months. These 30-year loans have a 3.75% interest rate for small businesses and 2.75% for nonprofits.

Should you pay it back early or wait?

If you’ve already received an EIDL but haven’t needed to use the funds, you may be wondering if you should pay it back. The maximum amounts of the loans were six months of working capital or up to $150,000. The loans can be prepaid at any time with no early payment penalties. However, interest does accrue during the deferral period.

See related: Should you get another round of PPP money?

Some business owners don’t like to have unnecessary debt on their books, so it might make sense to pay it back early. But before you do, it is important to think about your financing needs in the future.

An EIDL can be used for working capital and normal operating expenses, as long as you are not using it for the same purpose as Paycheck Protection Program loans. As the SBA further explains on its website, it can be used “to meet financial obligations and operating expenses that could have been met had the disaster not occurred.”

Given what the business community has been through with COVID, it may be worthwhile for small businesses to keep their loan funds in the bank for a while longer, just in case. If your business was hit hard by COVID, it may be hard to get other types of funding at a similarly low interest rate right now in the next year or two.

The state of your business’s finances may make bankers nervous. The only alternatives may be high-interest types of financing or credit cards, which might not offer the credit limits your business needs.

If you are holding onto money you don’t really need, make sure you are not overspending because you have more money in your business bank account than usual. Although the interest rates on the loans are low, you will have to eventually pay back the portion of the loans that are not forgivable. A good rule of thumb is to use the money only if you truly have to. If you have any concerns about holding onto it a little longer, speak with your accountant for advice specific to your situation.

See related: How to keep track of your EIDL spending

Bottom line

Although the world is starting to re-open, the crisis isn’t completely over, and there is still uncertainty. Keeping some extra EIDL money in the bank could be a good insurance policy for the near future.

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