Can an EIDL Loan Be Transferred to a New Owner?

The Economic Injury Disaster Loan (EIDL) program, administered by the Small Business Administration (SBA), provided crucial financial support to small businesses impacted by declared disasters. These loans were designed to help businesses meet financial obligations and operating expenses that could have been met had the disaster not occurred. As businesses evolve and ownership transitions, questions arise regarding the status and transferability of existing EIDL obligations. This article explores the process and considerations involved when a business with an outstanding EIDL loan undergoes a change of ownership.

EIDL Loan Transfer Policies

Transferring an EIDL loan to a new owner is not automatic and requires approval from the Small Business Administration (SBA). The SBA treats any change in business ownership as a “servicing action” that necessitates their review and consent. This stems from the original EIDL promissory note, which typically states that a borrower is in default if they reorganize, merge, consolidate, or change ownership without the SBA’s prior written approval.

The SBA evaluates several conditions before considering an EIDL loan assumption by a new owner. The SBA’s primary concern is ensuring continued loan repayment, assessing the new owner’s financial capacity, business experience, and the overall viability of the business. While assumption is possible, the SBA often prefers the loan to be paid off at the time of sale, particularly if the business is financially sound.

The terms of EIDL loans, such as low fixed interest rates and long repayment periods, make them attractive for a buyer to potentially assume. However, the SBA’s decision is discretionary and based on a comprehensive review of the proposed transaction and the new borrower’s qualifications. The existing borrower typically remains liable for the loan if a full release is not granted, which is a key consideration during negotiations. Any business contemplating a sale with an EIDL loan must proactively engage with the SBA to understand specific requirements and potential outcomes.

Information Needed for Loan Assumption

Preparing an EIDL loan assumption request for the SBA involves compiling a comprehensive package of financial and business documentation from the prospective new owner. The SBA requires evidence that the acquiring entity possesses the financial strength and operational capability to manage the existing loan obligations. This typically includes detailed financial statements for the acquiring business, such as recent balance sheets, income statements, and cash flow projections.

Personal financial statements are also required for the new owner(s) and any individuals providing a personal guarantee for the loan. These statements provide the SBA with insight into the individual’s assets, liabilities, and overall financial position. A well-structured business plan for the acquiring entity is additionally necessary, outlining how the business will operate under new ownership, its strategies for growth, and its capacity to generate sufficient revenue to cover loan payments.

Specific details of the proposed business sale, such as the asset purchase agreement or stock purchase agreement, must also be included. These documents clarify the terms of the transaction and how the EIDL loan is addressed within the sale. Information related to the existing EIDL loan, including its original terms, current outstanding balance, and loan number, is also a required component of the package.

Submitting the Assumption Request

Once all necessary information and documentation are prepared, formally submit the EIDL loan assumption request to the Small Business Administration (SBA). The primary method for communicating with the SBA regarding EIDL servicing actions is through their COVID EIDL Servicing Center (CESC). Requests can be initiated by contacting the CESC via email at [email protected] or through the MySBA Loan Portal.

When sending an email, include the loan number, business name, and a clear reason for the request in the subject line and body to ensure proper routing. The submission package should be well-organized, with digital files clearly named if submitting electronically, to facilitate the SBA’s review process.

After submission, the SBA will typically send a confirmation of receipt. The processing timeline for EIDL loan assumption requests can vary, often taking several weeks to a few months, depending on the complexity of the request and the SBA’s current workload. During this period, the SBA may request additional information or clarification; timely and complete responses are important to avoid further processing delays. The SBA will communicate its decision directly to the parties involved.

Managing the EIDL Loan During Business Sale

Beyond the formal assumption process, businesses selling with an EIDL loan must consider several strategic options and responsibilities. If an EIDL loan assumption is not feasible or desired, the most straightforward alternative is for the seller to pay off the outstanding loan balance at closing. This often occurs using a portion of the sale proceeds, ensuring the business transfers to the new owner free of the EIDL obligation. This approach can simplify the transaction and remove the SBA from the closing process.

The seller’s responsibilities extend to understanding their ongoing liability if the loan is not fully assumed or paid off. For many EIDL loans, particularly those over a certain threshold, a personal guarantee was required from the business owner. If the loan is not assumed by the new owner and the personal guarantee is not released by the SBA, the original owner remains personally liable for the debt. Clear agreements within the business sale contract are important, outlining responsibilities for the EIDL loan and any indemnities.

Buyers conducting due diligence should thoroughly verify the EIDL loan’s status, terms, and any associated liens on business assets. This verification protects the buyer from inheriting undisclosed liabilities. Transparent and timely communication with the SBA is also important throughout the entire sale process, regardless of whether an assumption is sought. Informing the SBA early about the intent to sell and providing updates can help prevent issues and ensure compliance with loan covenants.