COVID Relief: How You Can (& Can’t) Use Your Economic Injury Disaster Loan & Advance
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Expert Analyst & Reviewer
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If you’re a small business owner, odds are you’ve been impacted in some way by the COVID-19 pandemic. And if that impact has been huge? You’re definitely not alone. Small business owners around the world have been hit hard, with many struggling to keep their businesses afloat. Fortunately, there are a few financial opportunities available to help you through these difficult times. One that you may have already heard of is the Small Business Administration’s Economic Injury Disaster Loan (EIDL).
The EIDL is a low-interest, long-term loan for small business owners that have been impacted by COVID. These loans offer low, fixed rates and repayment terms up to 30 years. Businesses with fewer than 500 employees, certain nonprofits, and agricultural businesses can apply and be approved if they meet all criteria set by the SBA.
One of the most common questions we’ve come across is how EIDL funds can be used. The good news is that there are limited restrictions on the usage of these loans. While most of your operational expenses will be covered, though, there are a few restrictions. Whether you’re still waiting to apply for your loan or your funds just hit your bank account, keep reading to learn more about how you can — and how you can’t — spend your EIDL funds.
Table of Contents
What EIDL Loans Can Be Used For
The great thing about EIDLs is that there are very few restrictions on how funds are spent. According to the SBA, funds should be used for “financial obligations and operating expenses that could have been met had the disaster not occurred.”
What does this mean? Quite simply, it means that your day-to-day operating expenses can be covered using EIDL funds. EIDL funds are meant to help you keep your business doors open following a disaster. These loans help fill the gaps in income caused by a disaster (such as the COVID-19 pandemic) and serve as working capital to help your businesses be successful despite the challenges that come following such a disaster.
Let’s take a more specific look at how your EIDL funds can be spent. Qualifying expenses that can be covered using an EIDL include:
- Working capital
- Rent
- Utilities
- Payroll expenses
- Fixed debt payments
- Health care benefits
- Supplies
- Inventory
- Marketing & advertising
- Accounting & bookkeeping services
- IRS tax payments
You can use funds to pay yourself but only for work that you are doing within the business — dividends, for example, are not covered.
It should also be noted that there are further restrictions on how funds are spent if you also received a Paycheck Protection Program (PPP) loan. We’ll dive deeper into these restrictions later in this post.
Regardless of how funds are spent, make sure that you are keeping accurate records. The easiest way to do this is by using a business bank account and tracking expenses in accounting software.
Using Your Loan VS Advance
Many small business owners took advantage of the EIDL Advance, a grant of up to $10,000 that does not have to be repaid. If you received an EIDL Advance, funds can be used in the same way that EIDL funds can be used — as working capital or to cover operating expenses.
Using EIDL Funds When You Also Have A PPP Loan
Now, what happens if you have received an EIDL as well as a Paycheck Protection Program Loan (PPL)? This is where things can get confusing — so let me reiterate the importance of tracking how funds are spent.
PPP loans are far more restricted in how they are spent if borrowers want to have their loans fully forgiven. Small business owners that received PPP loans receive loan forgiveness by spending funds on these qualified expenses:
- Payroll expenses
- Rent or lease
- Mortgage interest
- Utilities
Now, how does this impact how you spend your EIDL funds? The caveat for borrowers that received both the PPP loan and the EIDL is that funds can not be used for the same purpose. For example, if you received both loans and spent your PPP funds on payroll expenses, you can’t also use your EIDL funds for these same expenses during your eight- or 24-week PPP covered period. The same rule applies if you received the EIDL Advance.
How You Can’t Use Your EIDL
While there are numerous ways to spend your EIDL funds, there are a few restrictions as outlined by the SBA. Let’s take a look at the straightforward restrictions, then look at a few that are a little more complicated. You are restricted from using your EIDL funds for the following purposes:
- Dividends & bonuses
- Acquiring fixed assets
- Expansions
- Refinancing long-term debt
- Repairing or replacing physical damage
- Relocation
- Paying penalties from non-compliance with a government law or regulation
Other restrictions for EIDL funds are:
- Disbursements: EIDL funds can’t be used to pay disbursements to owners, officers, partners, directors, or stockholders. The only exception is when disbursements are related to services or performances that are performed for the benefit of the borrower. For instance, an owner that draws a salary if work is performed within the business can be paid a salary from EIDL funds.
- Stockholder/Principal Loan Payments: The SBA restricts borrowers from repaying stockholder and principal loans. The only exception is when the funds were disbursed on an interim basis because of the disaster. It must also be shown that the non-payment of the loan would result in undue hardship on the stockholder or principal.
- Direct Federal Debt: EIDL funds can not be used to repay direct federal debt, including SBA loans.
- Loans Owned By Federal Agencies: Your EIDL funds can’t be used to make installment payments, pay down, or pay off any loan owned by a federal agency. This includes the SBA and any Small Business Investment Company licensed under the Small Business Investment Act.
FAQS About How To Use An EIDL Loan
More On COVID Relief For Small Businesses
Looking for other COVID relief options for your small business? Merchant Maverick has you covered! We’ve taken the time to research a variety of options to help you during this difficult financial time. Check out our coronavirus resource center, where you’ll find more information on everything from emergency business loans to guidance on using business credit. There are a number of resources available to help your business during this critical time, so take the time to learn more about these resources. Good luck and stay safe!
Erica Seppala
Expert Analyst & Reviewer at Merchant Maverick
An expert in accounting, finance, and point of sale, Erica has been researching and writing about all things small-business since 2018. Erica's insights into personal and business finance have been cited in numerous publications, including MSN, Real Simple, and Reader's Digest. She is a graduate of Limestone College.
View Erica Seppala's professional experience on LinkedIn.
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Hello! So my situation is a little interesting, I think. Also deals with fixed assets.
I’m an independent contractor that drove for Lyft and Uber. The vehicle I was using was repo’d earlier this year (could not make the payments due to loss of income due to COVID). Since that was how I did my driving and I can’t do the driving without a vehicle – how is it possible that I wouldn’t be able to use these funds to replace something that I would have had, had the virus not happened?
Thanks for your input!
Hi Ray!
Thanks for the question. Unfortunately, the SBA specifically prohibits the usage of the funds for “expansion of facilities or acquisition of fixed assets.” And, this would include the purchase of a vehicle. This is simply how the EIDL is structured, but if you need to purchase a vehicle, you could look at other SBA or small business loan options or check out our article on business auto loans. Sorry to be the bearer of bad news — Best of luck!
Hello. If I use the money for business expenses. Would the income generated from the business then be free to be used how I want? Example I spend $50,000 on food And sell $50,000 in food. Then the $50,000 is free to spend how I want?
Hi Kyle!
The EIDL is designed to be used as working capital for everyday expenses of your business. This includes things like supplies and inventory. If your business would traditionally spend $50,000 over a period of time on food to sell to your customers, then you could use your EIDL funds for this purpose. The income that you generate from those sales would be business income that you could then spend however you would like. Good luck!
When working out of your own home, how do you calculate expenses for mortgage payment and utilities that can be paid for by the EIDL funds? Are they a certain percentage of the bills? Also my pay checks vary by sales. Should I average them over a period of time to allow myself to take a bi-weekly pay? TIA!
Hi Jody!
Typically, we calculate home office expenses by finding the percentage of the home and utilities that are being used for business purposes. This is what is done when calculating home office deductions on our income tax return. Unfortunately, the SBA hasn’t released any guidance as to how these expenses should be calculated for EIDL. I would recommend reaching out to the SBA directly to find out more for your specific situation.
As far as how you should pay yourself, look no further than Line 31 of your Schedule C. Divide this number by 52 to determine your average weekly profit and can be used to guide how much you pay yourself. If you plan to pay yourself bi-weekly, multiply this number by 2. For example, if the annual profits on line 31 are $52,000, dividing this number by 52 would show that your average weekly profits were $1,000. If you’re paying yourself every two weeks, you would pay yourself $2,000 per pay period. Hope this helps!
Can you purchase a fixed asset with existing funds, for instance down payment, and the use EIDL loan proceeds to make installments.
Hi William!
The purpose of the EIDL is to help small businesses “meet financial obligations and operating expenses that could have been met had the disaster not occurred.” Funds can’t be used for purchasing fixed assets, expansion, or to replace lost sales or profits. Based on the available guidance from the SBA, I am inclined to say that purchasing a fixed asset with your own funds and then immediately using EIDL funds to make payments on that asset is not permissible. However, you can always reach out directly to the SBA for further guidance on your specific situation. Good luck!
If I’m correct in saying EIDL loans can be used for equipment repairs, then what about replacements? For example, a desk chair is damaged beyond repair but is necessary for my business. Would a replacement chair be allowed? Or for another example, say the engine in my supply truck goes and the cost to replace the engine is more then the value of the truck itself. Can I replace the truck with a comparable one? Essentially, can an existing capital asset be replaced using an EIDL loan with a comparable item if it is determined that it can’t be repaired?
Hi Bill!
Unfortunately, EIDL funds can’t be used for repair costs. EIDL funds also can’t be used to purchase fixed assets, whether it’s something you need to expand your business or just a replacement like the examples you gave in your comment. EIDL funds can be used for day-to-day operating expenses. Another source of funding would need to be used for repairs and replacement of equipment. Good luck!
Can the eidl advance be used to purchase a camera? I will be taking pictures of inventory and its an ongoing expense to me because I will have inventory in monthly.
Hi Christina!
Unfortunately, a camera would be considered an asset that wouldn’t be covered under the EIDL Advance. These funds are to be used for normal operating expenses that would have normally been met had the pandemic not occurred. If you’ve used a portion of your advance to pay yourself a salary, you can certainly use the funds you pay yourself for any purchases not covered under SBA rules. Good luck!
DO you have to prove how you used the advance, or just with the loan? Just want to be sure my files are in order should anyone come asking.
Hi EB!
As of right now, there isn’t anything in place that says you have to prove to the SBA how you used the advance. However, in the event that you face an IRS audit, it’s always good to have all your records in order, including those related to your EIDL loan or advance. This could be as simple as just hanging onto your receipts, using good accounting software to account for purchases, or having bank statements on hand that show your deposits and purchases.
Can you pay off a business vehicle loan you had before the advance?
Hi Alan,
Fixed debt payments can be paid using your EIDL or EIDL Advance funds. This includes loan payments for vehicles that are used exclusively for business.
Hi, I have a hair salon and pre-COVID , there were 5 stylists working there. Since we have returned to work, we only have 2 which greatly affects my monthly income. I can’t find anyone to work there as we share spaces/ rooms. Clients do not want to be in a room with other’s. It’s been 15 months and no luck. I was applying for an edil in order to be able to afford separating work spaces so I can fill those stations. Can I use the eidl in this manner?
Hi Donna!
Unfortunately, the EIDL can be used to cover normal operating expenses and financial obligations that would have been met if not for the pandemic. This includes things like payroll or rent. Things like renovations or business expansion would not be covered expenses. However, one option to consider is an SBA 7(a) loan, which has more flexibility and would allow you to separate workspaces or make other renovations to your salon. You would have to meet all requirements, including credit requirements, to qualify, but it’s something certainly worth looking into. Good luck!
Can you purchase a computer and small office equipment with an eidl advance? My laptop i use for my biz is 10 years old…
Hi Laurie!
Per the SBA’s rules for EIDL loans and advances, fixed assets and equipment are not covered expenses. EIDL funds should be used for day-to-day operating expenses. For example, funds could be used to cover payroll expenses, utilities, or office supplies.
If you’re unsure of a purchase that you believe is part of your daily operating expenses, you can contact the SBA directly to learn if these purchases are eligible expenses. Good luck!