Loan Management - How to Pay Back Pandemic Loans in 2023
March 2, 2023
The pandemic represented an existential crisis for many companies. Luckily, millions of firms were able to take advantage of government programs to keep their doors open during COVID. However, while this support provided a lifeline during the emergency, business owners and managers are still dealing with the aftermath.
Over 3.5 million small businesses took out Economic Injury Disaster Loans (EIDLs) during the pandemic. Payments on those loans are now due for many of these firms. Meanwhile, these higher costs come even as small businesses and startups deal with challenges like inflation, staffing shortages, and supply chain issues.
Given these headwinds, how can your small business or startup manage to make these payments? This article provides details about the EIDL program and offers some advice about how to manage all the emergency loans you took on to survive the pandemic.
What was the EIDL program?
At the height of the COVID restrictions, many small businesses were pushed to the verge of bankruptcy. Suddenly deprived of revenue, companies struggled to make it through to the end of the pandemic. In this environment, the government opened up a variety of programs meant to offer relief.
The most famous of these came in the form of the Paycheck Protection Program, PPP loan. However, this was just one of a collection of financial support opportunities that businesses turned to during the pandemic to stay afloat.
The Economic Injury Disaster Loan program, or EIDL, represented another of these support lines. Processed through the Small Business Association, or SBA, the initiative distributed a total of about $390 billion to nearly 4 million small businesses.
Processed through the Small Business Association, or SBA, the [EIDL] initiative distributed a total of about $390 billion to nearly 4 million small businesses.
The program was established as part of the CARES Act, which went into action in March of 2020. The EIDL program accepted applications through 2021, with some approvals lasting into the early part of 2022.
This help consisted of loans of up to $2 million for businesses with fewer than 500 employees. While the potential amount capped out in the millions-of-dollars range, the average loan amount stayed below $100,000 throughout the history of the loan, even after the cap was raised.
Loan amounts were determined based on the company's working capital needs. Basically, the funding was meant to keep the company in operation during the COVID emergency. As such, there were restrictions — it wasn't meant for functions like expansion, payment of dividends or acquisition of equipment. Rather, the program was meant to keep the firms going until the pandemic passed.
Generally speaking, the EIDL loans came with generous terms. The interest rates were capped at 4% and typically ran at 3.75% for businesses. The maturity stretched to up to 30 years, with payments deferred for two years.
Challenges as EIDL loans start to come due
As we noted, EIDL loans included a two-year deferment. As these deals were struck in 2020 and 2021, many companies have already begun repayment.
However, even with the relatively easy terms of these loans, the added expense comes at a difficult time. Yes, the business environment has improved significantly since the depths of the pandemic. However, your firm still faces a challenging economic environment, with other potential hurdles still to come.
The lifting of the COVID restrictions has caused lingering dislocations in the economy. For example, 2022 saw the highest inflation rates in 40 years. This has led to higher costs across the board, with the repayment of EIDLs adding to this pinch on your cash flow.
Meanwhile, other business challenges are hampering your recovery. Supply chains continue to see periodic tangles. At the same time, higher interest rates make future borrowings more expensive, limiting your near-term funding options.
Adding to these concerns, experts are predicting a potential recession down the road. An economic downturn could create revenue pressures, exasperating the cost issues that you're already dealing with. All this makes those EIDL loan payments even more of an encumbrance.
Tips for managing business loan payments during hard economic times
The EIDL payments represent just one headache in a generally complicated economic situation. They underline the need to handle all your loan payments carefully as you navigate a challenging environment.
To that end, here are some tips for managing business loan payments during hard economic times, helping you take care of your EIDL responsibilities as well as the rest of the funding liabilities you face:
Keep your operation lean during difficult economic times. That means minimizing costs and maximizing your cash flow. This will give you the resources you need to service any debt you have while lowering the chances you'll need to seek additional funding.
Know the Terms of Each Loan
Understand the details of every outstanding loan. This will help you manage the situation as things get tight. Missing a credit card payment might lead to late fees. But default on a debt with your main lender — that could undermine your overall operation.
Even simple things like knowing the various due dates when payments are required can help you juggle a difficult situation. The more details you have, the better you can gameplan your options when hard decisions come up.
Refinance, If Possible
If you have expensive debt, look for ways to reduce those liabilities. You might be able to use lower-cost borrowings to pay off regrettable loans you jumped into when you hit a difficult situation in the past.
Focus on Paying Down Higher-Cost Loans
If you have extra cash, you can begin paying down the debts you accrued during the pandemic. As you do, target high-cost loans first. That will give you the biggest bang for your buck in terms of lowering the expenses related to loan servicing.
In many cases, the EIDLs will represent relatively cheap debt to maintain. With a 3.75% interest rate (in a time when rates in general are moving higher) and a 30-year timeframe, you are likely better off paying the minimum on this front and focusing repayment efforts on other loans.
With a 3.75% interest rate (in a time when rates in general are moving higher) and a 30-year timeframe, you are likely better off paying the minimum on [EIDL loans] and focusing repayment efforts on other loans.
However, your precise strategy will depend on your circumstances. Review your options and create a game plan based on the loans you have outstanding and their specific terms.
Look for Other Funding Options
There are other ways to raise money besides loans. You might be able to dip into these to avoid further borrowings or even pay back your existing liabilities, including EIDLs.
The most obvious of these options is equity investments. In many cases, it's desirable to sell a share of the company to bring in additional cash.
However, it's important to weigh this option carefully. Selling a sizable stake in your firm comes with its own concerns and complications. Do your research and carefully consider the implications before making any final decisions.
Learning how to deal with EIDLs and other loans
Securing financing during trying times is crucial to keeping your small business or startup afloat. As such, you might have turned to the EIDL program or other funding options during the pandemic. However, you also need to learn how to deal with the implications of those decisions.
Paying back those loans is equally as important now that the worst of the pandemic is (hopefully) permanently in the rearview. This will let you avoid high interest fees or even more serious complications. However, a bumpy economic situation has complicated matters. As such, use the information provided in this article to manage your loan payments, whether it’s for an EIDL or otherwise.