So, you took the plunge and grabbed a Paycheck Protection Program (PPP) loan or an Economic Injury Disaster Loan (EIDL). Maybe your business was hit hard during the pandemic, or maybe you’re just being financially cautious. Either way, you might be wondering what’s next. Specifically, how do you apply for forgiveness for these loans and keep yourself out of hot water with the SBA?
Let’s cut through the confusion. Here’s what you need to know about using those loan funds properly so you stay compliant and maximize your benefits without ending up in hot water.
The SBA is Watching Your Finances
If you accept a PPP or EIDL loan, the SBA has the right to review your financials at any time. Yep, that means they can peek into your books to make sure you’re using the funds the way you said you would. Now, we get it—having the government eyeballing your finances sounds intrusive. But it’s important to keep in mind that the whole point of these loans is to help businesses survive during the crises—not to trap you.
Still, don’t mistake this for a free pass. Misusing the funds can lead to some serious consequences. The SBA can fine you up to 1.5 times the loan amount if they catch you using it incorrectly. So, if you took out a $100,000 loan, a fine of $150,000 (on top of what you owe) could come your way. That’s the kind of news no one wants to hear when they’re already under financial pressure.
Understanding the Difference Between PPP and EIDL
While both the PPP and EIDL are government-backed loans meant to help businesses during tough times, they have different purposes and rules. Let’s break them down:
- PPP Loans: Primarily designed to help you keep employees on payroll during a crisis. You can apply for loan forgiveness if you meet certain criteria, like using at least 60% of the loan for payroll.
- EIDL Loans: More flexible and intended to cover a broader range of operating expenses. EIDL loans do not have forgiveness options, so you’ll be expected to repay them according to the terms set by the SBA.
It’s important to understand these distinctions so you can plan how to use each loan effectively. If you have both, prioritize spending based on the loan forgiveness requirements and repayment schedules.
What You Can Use EIDL Funds For
EIDL loans are designed to cover working capital, which essentially means the costs needed to keep your business afloat. Here’s the official checklist of what qualifies:
- Fixed Debt: Rent, utilities, and other recurring bills that keep your business running.
- Payroll: Paying your employees (and yourself, if you’re not giving yourself a bonus or bump in salary).
- Accounts Payable: Covering outstanding bills—the kind you’d have paid if disaster hadn’t struck.
- Other Working Capital Needs: If it’s tied directly to keeping your business going, you’re probably in the clear. Just don’t get cute with it.
The SBA’s definition of “working capital” isn’t vague. It’s basically all the stuff you need to keep your lights on and your doors open. Don’t try to stretch that definition into a luxury upgrade or anything else the SBA wouldn’t approve.
What You Cannot Use EIDL Funds For
Now, here comes the not-so-fun part—the list of things you cannot use the funds for. We know it’s tempting to think, “I’ll use these funds to refinance my debts” or “Maybe I can finally redo the office.” Nope. Here’s what’s off-limits:
- Dividends or bonuses: No treating yourself or your team to extra perks.
- Shareholder or owner disbursements: You can pay yourself a regular salary but no additional distributions.
- Repayment of shareholder loans: If your business owes you money, you can’t pay yourself back with EIDL funds.
- Facility expansion: Thinking of upgrading your office or buying new equipment? That’s off-limits.
- Repairing or replacing property damage: EIDL isn’t for covering disaster-related physical damage.
- Refinancing debt: You can’t use these funds to pay down or consolidate long-term debt.
- Relocation: Moving your business to a new location is not an approved use.
Don’t Treat It Like Free Money
One of the biggest mistakes we see business owners make is treating these loans like a free pass to kick the can down the road. Taking on debt—especially in the middle of a crisis—shouldn’t be taken lightly. You need to ask yourself: How was my business doing before COVID-19? If your business was already struggling, taking on this loan might just give you more debt to deal with after the crisis. It’s a band-aid, not a cure.
This is why we recommend that you first do a 13-week cash flow analysis before considering any loan options. You need to make sure that, even if you take on debt, your business will be able to survive and thrive in the long term.
Keep Your EIDL Funds Separate
To stay on the SBA’s good side, we recommend using a separate bank account for your EIDL funds. This not only helps you keep track of how the money is spent but also creates a clean paper trail to show the SBA you’re following the rules.
If you’re already using the Profit First method, you’ll know the importance of dedicated accounts for income, expenses, and other financial needs. Here’s how you can adapt this system to include EIDL funds:
- Create a Dedicated EIDL Account: Put the loan funds in a separate account, untouched and ready for approved uses.
- Only Transfer What You Need: Move only the necessary funds into your primary operating account to keep things clean.
- Keep Detailed Records: Note down what each transfer is for. If you’re moving $10,000 to cover payroll, record that it’s for approved payroll expenses.
With this setup, you’re protected against potential SBA audits and can sleep easy knowing you’re following the rules.
Structuring Your Accounts to Keep Things Clean
We can’t stress this enough: Keeping your finances organized is the key to avoiding trouble with the SBA. If you’re familiar with the Profit First method, you know that we recommend separating your accounts for different purposes. The same principle applies here. Here’s how you can do it:
- Create Separate Accounts: First things first: open distinct bank accounts specifically for your PPP and EIDL funds. This isn’t just about being extra; it’s about setting yourself up for a win. Keeping these funds separate from your general operating account ensures that you’re not accidentally mixing them up with your regular expenses. Trust us, a little separation now means a lot less chaos later. With these dedicated accounts, you’ll know exactly where your PPP and EIDL money is going.
- Assign Each Account a Clear Role: Now, don’t just open a new account and call it a day. Assign it a clear, specific role. Whether it’s for payroll, rent, or other SBA-eligible expenses, make sure you know what each account is used for. This step is crucial when you’re tracking your spending and trying to stay within SBA guidelines. And yes, it makes your bookkeeping team—or you if you’re managing your finances solo—extra grateful.
- Transfer Funds as Needed: Here’s where the real magic happens: transfer funds from your dedicated accounts into your general operating account only when necessary. By doing this, you ensure that your loan funds remain intact for their intended use, which means you can easily prove your compliance with the SBA if needed. Plus, it keeps your cash flow neat and tidy.
- Keep a Close Eye on Your Spending: Staying on top of where your money goes isn’t just a good idea—it’s essential. Whether you’re using accounting software, a simple spreadsheet, or a combination of both, log each transaction and tie it back to the appropriate account. You’ll thank yourself when tax season rolls around or if you get called in for an audit. This isn’t just about following the rules; it’s about having peace of mind.
- Be Ready for Anything (Yes, Even an Audit): Yes, we know audits sound about as fun as a root canal, but they’re a reality for businesses that receive government funding. So, what do you do? Prepare like it’s your job—because, well, it kind of is. Having these organized accounts and thorough records means you’re not scrambling at the last minute trying to figure out what money went where. Detailed documentation is your golden ticket.
- Work With Your Financial Team: Whether you’re an accounting pro or someone who dreads math with a passion, having a financial expert on your side is a smart move. Share your new account structures with your accountant or bookkeeper and let them keep tabs on your records. Trust us, having that extra layer of oversight is worth its weight in gold.
Why This Matters
So, why go through all this hassle? Simple: By taking the time to structure your accounts and keep things clean, you’re protecting your business’s future. You’re showing lenders and potential investors that you know what you’re doing and that your financial house is in order. And while the primary goal of PPP and EIDL was to keep businesses afloat, how you handle the process says a lot about your financial savvy. Make these smart moves now, and you’ll thank yourself later when everything’s running like a well-oiled machine.
In the end, it’s all about being proactive. Keeping your finances organized isn’t just about the SBA; it’s about setting your business up for long-term success. So, take these steps, stay organized, and watch how much smoother things go. Because when it comes to money, it’s better to be safe than sorry—especially when it’s money that’s supposed to be keeping your business strong and thriving.
Stay on top of your game, and your business (and sanity) will thank you.
