The Hidden Strings on Your EIDL Loan

You may think you can raise equity freely, but without the SBA's permission, you could be planting a compliance landmine in your business.

During the pandemic, millions of small businesses turned to the Small Business Administration's Economic Injury Disaster Loan (EIDL) program to stay afloat. For many, those loans were a lifeline. But like all loans, they came with strings attached—strings that many entrepreneurs have since forgotten.

One of those strings is this: If you still have an EIDL loan outstanding, you can't sell equity in your company without the SBA's permission.

At first glance, that may not sound like a big deal. After all, when you raise capital from investors, the deal will most likely close without anyone flagging it. The SBA isn't hovering over your shoulder. But the problem doesn't vanish—it just gets deferred. It can resurface years later, during an audit or when you go back to the SBA for another loan, and suddenly the agency sees that your changed ownership structure violates the terms of your original EIDL.

Just last week, I spoke with an entrepreneur who learned this lesson the hard way. He received nearly $900,000 through the EIDL program. To him, the appeal was obvious: long-term capital at a very low rate. He used a chunk of the proceeds to pay off a deal he'd made before the pandemic to buy out a partner—at a valuation that was far too high in hindsight. The EIDL gave him the breathing room to do it.

Now, however, his company needs capital again. To obtain a new SBA loan, the agency would have to agree to subordinate the original EIDL—something that will be difficult, given the way he used the EIDL money. In his head, the obvious answer is to sell equity instead. But when I explained that even that option requires SBA permission, the look on his face said it all.

Why does the SBA care? From its perspective, the loans are given to help businesses get through an economic crisis. If new investors decide to come in before the loan is paid off, the SBA wants some of its money back. Otherwise, the agency would be allowing the new investors to take advantage of the favorable loan terms. That's why the agency insists on having a say.

The lesson is simple: Don't assume you're in the clear just because you closed a round or used your EIDL in a way that felt smart at the time. If you have an outstanding EIDL and plan to raise capital—whether through debt or equity—get in touch with the SBA early. Otherwise, you risk discovering years down the road that you've stepped on a compliance landmine.

EIDL loans kept many businesses alive. But they also left behind traps like this one. The fine print may not matter today, but it will eventually.