Dealing with Existing EIDL Loan and Lien 

Based on the latest Standard Operating Procedure (SOP) 50 10 7.1 issued by the SBA on December 2, 2023, the SBA places a lien on all Economic Injury Disaster Loan (EIDL) approvals exceeding $25,000. This threshold applies to both loans and advances disbursed under the COVID-19 Economic Injury Disaster Loan (EIDL) program.

Let’s look at the situation of a business borrower seeking a new loan while currently having an existing Economic Injury Disaster Loan (EIDL) with a lien on the business assets. It outlines the three options available to address the existing EIDL lien: lien release, lien subordination, and payoff through inclusion in the new loan.

In the wake of Covid-19, many businesses sought financial relief through the Economic Injury Disaster Loan (EIDL) scheme. While the terms of the EIDL loan— a 30-year term with a 3.75% interest rate— are undoubtedly appealing, they come with their own set of challenges when obtaining a new business loan. Any EIDL loan exceeding $25,000 requires collateral, and the SBA places a lien on these business assets.

For businesses with an existing EIDL loan seeking another loan, the lien presents a significant hurdle. The new lender will typically want a first-priority lien position on the collateral— a factor that necessitates addressing the existing EIDL lien. Here are three viable options:

1. Lien Release: This approach involves directly working with the SBA to release the EIDL lien. You would typically consider this option if the EIDL funds are no longer required or the loan is fully repaid. A lien release might require you to demonstrate financial stability and future repayment ability for the new loan. Although this approach provides flexibility for the new loan, it might involve complying with SBA-set requirements.

2. Lien Subordination: In this scenario, you negotiate with the SBA to subordinate the EIDL lien to the new loan's lien. This hierarchy means the new lender would become the primary beneficiary in case of default, followed by the SBA. Although this approach allows you to secure the new loan without releasing the EIDL lien, it may involve additional costs and complexities, including fees and convincing the SBA that the new loan won't threaten the repayment of the EIDL loan.

3. Payoff through Inclusion in New Loan: This approach involves integrating the outstanding EIDL loan balance into the financing of the new loan. This action effectively pays off the EIDL loan using the new loan funds, leading to a single loan with a new lien. While this option simplifies the borrowing process and eliminates the EIDL lien, it also increases the total loan amount and potentially the interest rate. This approach might be suitable if the interest rate or terms of the new loan are more favorable than the existing EIDL loan.

Remember, while the EIDL loan's long term and low-interest rate are attractive, the attached lien can complicate the acquisition of a new business loan.