Date: September 20, 2021
Are You Going to Pay More Interest Than You Thought?
When the pandemic hit America, millions of business owners were impacted. Government shutdowns escalated an already dire situation causing some businesses to close their doors forever. Others were fortunate enough to be able to take an Economic Injury Disaster Loan (EIDL) Loan to get them through the pandemic. Since the beginning of the program, there have been numerous changes to the deferment period (or how long you have until you have to start repaying). At the most recent update (March 16, 2021) the deferment period has been extended to 24 months for 2020 loans, and 18 months for 2021 loans, deferring all payments until 2022.
Many business owners accepted the loans even understanding that the 3.75% interest would continue accruing during the deferment period because for many this was the only option available at the time. However, many business owners also accepted the extended deferment period or even increased their loans under the assumption that the interest accrued was going to be for 12 months, not 18 or 24…
So, if you got a 500k loan in 2020 and wait to start paying until the extended deferment period is up, and pay for the full 30 years – you’ll wind up paying $359,301 in interest on your $500,000 loan…. (that is 71% of the total loan)! Or, 32 years of 3.75% interest, compounded monthly. If you were to pay the total back as soon as the deferment period was up, you’d just pay the interest for the 24 months, or in this example $19,765 (which is 3% of the total loan). Compare that to the former alternative and you can literally save a $*%# ton of money.
This is how the SBA is able to offer these types of loans, over the long term, the interest is all profit and they more than make their money back with plenty left over. Other situations that many business owners are not expecting or preparing for could result in random audits of how the funds have been spent, along with the review of accurate financial reports. If the owner can not produce satisfactory documentation, or if they spent the loan incorrectly then the loan can be required to be paid in full, immediately, including all capitalized interest from the date the loan was signed (so make sure you have your books in order)!!
While the EIDL loans are an amazing opportunity to access lost capital due to the pandemic, it’s also just enough rope to hang yourself if you’re not careful. The loans should only be used as a TEMPORARY replacement of lost working capital (or cash in the bank) needed to keep the business going. Anything more than that is going to position your business to pay exponentially more interest over the life of the loan than originally intended by the business owner when they applied for the loan in the first place.
The best course of action is to start repaying it now, or at least make sure you have a solid repayment plan in place.
Of course, we’re happy to help in any way we can. Click Here to schedule a call with Vanessa.