Best Practices: EIDL Lien Subordinations and Collateral Releases

In response to the COVID-19 pandemic, the Small Business Administration (“SBA”) granted low-interest, long term Economic Injury Disaster Loans (“EIDL”) to millions of small businesses. While the pandemic no longer dominates news headlines and the EIDL program no longer issues new financing, 7(a) Lenders are often required to address these existing EIDL loans when lending new money to borrowers. A few common scenarios that Lenders may encounter as a result of the EIDL loan program are outlined below:

Subordination Requests:

Since EIDL loans are generally secured by a lien on all business assets of the Borrower, 7(a) Lenders making a new loan to the Borrower often need SBA to subordinate its lien in order for the Lender to obtain its required first lien position on the assets of the Borrower.

The COVID-19 EIDL Customer Service center regularly handles these subordination requests. The Lender can reach out to the Service Center to request the “Application for SBA Lien Subordination”, which the Borrower will need to sign and complete. The application requires basic information such as the EIDL loan number, current owners of the Borrower, reasons for lien subordination request, listing of collateral to be subordinated, and the Lender’s commitment letter for the new financing. SBA regularly approves these subordination requests for 7(a) Lenders in its efforts to assist the 7(a) loan program. Once approved, SBA will email an executed subordination to the Lender. The Lender should then return its counter signed copy of the subordination agreement to SBA, with the Lender retaining a copy in its file.

Payoff Requests:

When financing a Borrower’s purchase of a Seller’s business assets, the Lender should address any liens on the assets to be acquired in the sale that are subject to a UCC-1 in favor of SBA which secure an EIDL loan. In a complete asset sale, Lenders typically require that the EIDL loan is paid off in full from the Seller’s sale proceeds. This ensures that the Seller is able to terminate SBA’s UCC lien on the Seller’s assets after the EIDL loan is fully paid, leaving the Lender in first lien position following closing. The Lender should require the Seller to obtain SBA’s payoff letter with wire instructions prior to proceeding to closing. The payoff information for an EIDL loan can be obtained from the COVID-19 EIDL Customer Service at 833-853-5638 or email COVIDEIDLServicing@sba.gov.

Collateral Release:

If a Borrower purchases a portion of a Seller’s assets or specific equipment that is subject to an EIDL lien, a complete payoff of the EIDL loan may not be necessary. The EIDL Customer Service center can facilitate a Seller’s request for SBA’s release of the specific collateral via the “Application for Release of Collateral”. After receiving the application, the SBA may require the Seller to pay down a portion of the EIDL loan as consideration for SBA releasing its lien on the specific assets. The collateral release ensures that the Borrower receives the purchased assets free of any EIDL lien and allows the Lender to obtain its proper lien position. Sellers may prefer the collateral release option compared to a full payoff given the low interests rates of EIDL loans if they are only selling specific equipment.

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 | U.S. Small Business Administration (sba.gov)

For more information regarding EIDL loans and their effect on Lender’s lien position, please contact the attorneys at Starfield & Smith, PC at (215) 542-7070 or visit us at www.starfieldsmith.com.