Best Practices: SBA’s Announcement for New EIDL Deferments Means 7(a) Lenders Must Continue to Address Assignment and Subordination Questions

In response to COVID-19, the Small Business Administration (“SBA”) was given the authority to make low-interest fixed-rate long-term COVID-19 Economic Injury Disaster Loans (“EIDL”) to help small businesses and other entities overcome the effects of the pandemic by providing borrowers with working capital to meet ordinary and necessary operating expenses. In order to further assist many small businesses, on March 15, 2022, Administrator Guzman announced that SBA would be extending the deferment period on EIDLs.

Whether an EIDL borrower wishes to take advantage of the additional deferment period is optional, so any borrower who wishes to make principal and interest payments may do so. Those who wish to take advantage of this new deferment opportunity will still be obligated to pay interest on the obligation.  When the deferment period ends, borrowers will be required to make regular principal and interest payments beginning 30 months from the date of the Note.

For SBA lenders looking to finance a new 7(a) loan, it is important to be aware of the existence of EIDLs and know the key issues to address. For example, an EIDL’s proceeds must be used for working capital and operating expenses in the business, so the monies could not be used as equity injection to purchase a commercial property for the business.

In addition, because EIDLs are generally secured by a lien on all business assets of the small business, 7(a) lenders would often want EIDLs to be subordinated to their 7(a) facilities. SBA has a system in place to help. In these situations, lenders should submit the form subordination request to the Disaster Loan Servicing Center as soon as possible to ensure a senior lien position can be obtained on the pending 7(a) loan.

Instead of seeking subordination, lenders may need to seek SBA’s consent on the borrower’s behalf in certain cases, such as when there is an assignment of collateral.  This is because EIDL loan documents include default language involving assignment of collateral in the note and in the security agreement.  In such instances, lenders would need to provide a letter from the “borrower” to SBA indicating that it was borrowing additional capital and providing the lender permission to seek SBA’s consent on the borrower’s behalf. SBA’s Birmingham Servicing Center is often an invaluable resource when these type of issues arise.

Finally, some borrowers may agree to assume a seller’s EIDL as part of a change of ownership. In these situations, the borrower and seller should provide the 7(a) lender with an Agreement for Assumption of Indebtedness executed by the borrower and SBA. The lender should also ensure the EIDL is included in the borrower’s cash flow analysis.

Even though the EIDL program is directly financed by the SBA to the borrower, 7(a) lenders should continue to stay informed of changes in the EIDL program and understand how they may impact future financings.

For questions regarding the SBA EIDL program and other forms of federal relief for small businesses, contact the attorneys at Starfield & Smith at 215-542-7070.