Best Practices: EIDL Lien Subordinations

Over the last couple of years, the COVID-19 pandemic and the current economic crisis have caused many small business owners to turn to SBA’s Economic Injury Disaster Loan (EIDL) program to help see them through the extraordinary challenges they face. Not surprisingly, many recipients of EIDL loans have required additional financing, beyond the EIDL loans, in order to keep their businesses alive and viable during these difficult times. The rub, of course, is that, in order for small businesses to qualify for new loans, lenders for these financings require liens on collateral in a position superior to SBA’s liens on its EIDL loans. This means that lenders need the Agency’s assistance with subordination requests to help the nation’s small businesses.

Lenders are fortunate that, as part of its Disaster Loan Program, SBA has a process designed to address the needs of small business recipients of EIDL loans when a subordination is needed and appropriate. Here is how the system works.

Lenders begin the process by contacting either the Birmingham Service Center (Bham.Realty@sba.gov) or the El Paso Service Office (ElPasoDLSC@sba.gov). The lender should request the “Application for SBA Lien Subordination (Business with Existing COVID EIDL)” form (the “Application”). The Borrower will need to sign and complete the Application. This will require the Borrower to provide SBA with information which justifies the reasonableness of the request. Among other items, SBA will need to evaluate and examine the reason for the lien subordination request, business entity and ownership data, and information relating to the loan requiring subordination, including a list of collateral to be subordinated. Along with the Application, additional documentation must be furnished in order to substantiate the request.

If approved, SBA will email an executed Subordination Agreement to the Borrower or Lender at the address provided. The Borrower or Lender will then return its signed Lien Subordination Agreement back to SBA, with the Lender retaining a copy for its loan file.

SBA also provides additional guidance on its website to help the parties manage their EIDL Loans and answer any questions that may arise. See link below:

Manage your EIDL (sba.gov)

For more information regarding EIDL Loan Subordinations, please contact the attorneys at Starfield & Smith, PC at (215) 542-7070 or visit us at www.starfieldsmith.com.