Are EIDL Loans Assumable in a Business Sale?

EIDL loans provided financial support to small businesses and non-profits impacted by the pandemic. Administered by the U.S. Small Business Administration (SBA), these loans provided working capital to alleviate economic injury. Many business owners now consider selling their businesses, raising questions about EIDL loan transferability or “assumability.”

Key Terms and Conditions of EIDL Loans

EIDL loans are direct SBA loans to businesses or sole proprietors for working capital. Funds covered fixed debts, payroll, accounts payable, and other operating expenses. They could not be used for business expansion or to refinance pre-existing debt. The interest rate for businesses was fixed at 3.75%, while non-profits received a 2.75% rate, with repayment terms extending up to 30 years.

EIDL loans involve collateral requirements and personal guarantees. Loans over $25,000 typically required a blanket lien on business assets, filed as a UCC-1 lien. For loans over $200,000, a personal guarantee from the owner was required, making them personally liable. These terms tie the loan directly to the original borrowing entity and its assets, influencing any potential transfer.

EIDL loan agreements restrict the sale or transfer of business assets or ownership without prior SBA consent. Businesses with an outstanding EIDL loan considering a sale, merger, or ownership change must first address the loan with the SBA. Failure to do so can result in default.

Rules Governing EIDL Loan Assumption

EIDL loans are generally not assumable by a new business owner or entity in a standard business sale. The SBA expects the outstanding EIDL loan to be paid off at the time of sale. This policy maintains the integrity of the EIDL program, designed for specific economic relief to the original business.

This approach stems from the loan’s purpose as disaster relief. When a business is sold, especially if healthy, the SBA typically does not consider it a hardship warranting transfer of favorable terms to a new entity. The loan was underwritten based on the original borrower’s circumstances.

While direct assumption is uncommon, any change in business ownership or structure for loans over $25,000 requires SBA approval. This differs from a typical loan assumption where a buyer takes over existing terms. SBA consent is necessary because loan documents often consider an ownership change a default event without prior approval. Implications for both seller and buyer are significant: the seller remains liable until the loan is satisfied or released, and the buyer must ensure the loan does not encumber acquired assets.

Process for Seeking Loan Assumption or Transfer

There is no standard “assumption process” for EIDL loans like for conventional commercial loans. Instead, a business owner selling with an outstanding EIDL loan must formally request SBA consent for a change of ownership. Communication with the SBA’s COVID EIDL Servicing Center (CESC) is required.

To initiate this request, contact the CESC via email at [email protected], through the MySBA Loan Portal, or by calling 833-853-5638. The request should include the loan number, reason, business name, and contact information.

The SBA requires specific documentation to review an ownership change request. This typically includes the executed sale agreement, prospective buyer’s financial information, and the new entity’s business plan. The SBA assesses the new owner’s ability to repay and may require a personal guarantee if approved for transfer. Approval is not guaranteed, and the SBA often prefers the loan paid off at sale.

Managing EIDL Loans During Business Sale or Transfer

When selling a business with an outstanding EIDL loan, the most common approach is to pay it off in full at sale. Sale proceeds are typically used, ensuring a clean transfer of business assets. Buyer due diligence should confirm the EIDL loan is satisfied; a payoff letter can be requested from the SBA with the EIDL loan number.

Refinancing the EIDL loan is another consideration, typically done by the seller before sale or as part of the buyer’s acquisition financing. EIDL funds could not refinance existing debt, so a new loan (e.g., SBA 7(a) or conventional financing) would be required to pay off the EIDL. This retires the EIDL, allowing the business to proceed with the sale without encumbrance.

Even if the loan is not assumed, any change in business ownership requires SBA notification and often consent, especially for loans over $25,000. This applies whether the transaction is an asset sale, stock sale, or merger. The SBA’s concern is to protect its security interest in business assets and ensure the loan remains secured.

Failing to address the EIDL loan during a business sale can lead to severe consequences. Without SBA notification and consent, the business could default on the loan agreement, potentially accelerating the debt. Since the SBA holds a lien on business assets for loans over $25,000, non-compliance could result in the SBA pursuing collateral. If a personal guarantee was provided, the original borrower remains personally liable for the debt unless formally released by the SBA.