The Loan That Helped Us Survive- But May Still Put Us Out of Business

A cautionary story for small-business owners about SBA Economic Injury Disaster Loans

If you own a small business, I want to share a word of caution- one learned through personal experience. Be very careful before accepting a Small Business Administration Economic Injury Disaster Loan, or EIDL.

During the COVID-19 pandemic, thousands of small businesses faced circumstances none of us could have anticipated. Customers disappeared. Offices closed. Revenue declined. Employees were worried about their jobs. Business owners were trying desperately to keep companies alive that they had spent years, sometimes decades, building. We were among them.

Our LLC was encouraged to consider an EIDL. We heard encouragement from people associated with the SBA, members of Congress, and others in government and politically appointed positions. The message seemed clear: these programs existed to help small businesses survive an extraordinary national emergency. So we applied. And we received a generous loan at what appeared to be a very reasonable interest rate.

At the time, it seemed like the responsible thing to do. We Used the Money to Keep Going. We didn’t take the money and close the doors. We didn’t use it to walk away from our responsibilities. We kept working.

We kept our employees on board. We continued serving our clients. We continued trying to make a positive difference in people’s lives during one of the most difficult periods our country had experienced in generations. The loan did what it was supposed to do: it helped us survive the pandemic. But there was something we did not fully appreciate at the time. Interest began accruing from the day we received the funds.

Although we initially had a period before payments were required, the debt wasn’t standing still during that time. By the time we began making payments, we already owed thousands of dollars more than we had originally borrowed. Then the monthly payments began. We made them faithfully. Month after month. Year after year. For approximately three years, we made the scheduled payments we were told to make. Eventually, we took a closer look at the numbers and discovered something that was difficult to believe: Our payments had not reduced the principal.

So we increased the amount we were paying. And yet today, after years of making payments, we still owe more than we originally borrowed. Think about that for a moment. We borrowed money to help our small business survive an unprecedented national emergency. We used that money to keep people working and continue serving our clients. We made our required payments faithfully for years. And we still owe more than we borrowed.

The Lesson We Learned Too Late

I’m not suggesting that we bear no responsibility. We signed the loan documents. We accepted the money. We had an obligation to understand the terms. That’s an important part of this story. But there is also a larger lesson here for every small-business owner. Never make a long-term financial decision based primarily on what someone tells you might happen later.

There was considerable discussion during the pandemic about government assistance, relief programs, forgiveness, changing rules, and additional help for struggling businesses. It was an extraordinarily confusing time. But administrations change. Congress changes. Policies change. Priorities change. Promises, expectations, political discussions, and possibilities are not loan terms. The words contained in the documents you sign are what matter.

If we could go back and make the decision again, I would ask much tougher questions. How much interest will accumulate before my first payment? How much of my scheduled monthly payment will actually reduce principal? What will the balance be after one year? Five years? Ten years? How much will I ultimately pay if I make only the required payments? What happens if my business never returns to its pre-pandemic revenue? And perhaps most importantly: What happens if the government policies I am counting on never materialize?

Those are questions every business owner should ask before accepting a government-backed disaster loan—or any substantial loan. Small Businesses Don’t Have Unlimited Resources Large corporations have finance departments, accountants, attorneys, sophisticated forecasting models, and sometimes entire teams devoted to managing debt. Very small businesses often have an owner sitting at the kitchen table trying to figure out how to make payroll on Friday. Those are two very different worlds.

During a crisis, the small-business owner isn’t necessarily thinking about amortization schedules twenty years into the future. He or she may simply be thinking: How do I keep my employees working? How do I pay the rent? How do I make it through another month?

That’s why programs designed to help small businesses should be communicated with extraordinary clarity—especially regarding deferred payments, accruing interest, amortization, and the true long-term cost of borrowing. We Survived COVID. Now We Have to Survive the Loan.

There is an irony in our story that is difficult to ignore. The EIDL helped our business survive COVID-19. Now I sometimes wonder whether the debt we took on to survive the pandemic could ultimately contribute to putting us out of business. That is a painful possibility.

We believed we were doing the right thing. We protected jobs. We continued helping clients. We worked hard. We honored our obligations. We tried to make a difference in our community and in the lives of the people we served. I don’t regret doing those things. But I do regret not understanding more clearly what this debt could eventually become.

So if you are a small-business owner considering an SBA disaster loan in the future, learn from our experience. Read every page. Ask questions. Get an amortization schedule. Have an independent accountant or financial adviser review the numbers. Calculate what happens during the payment-deferral period. Don’t assume a low interest rate automatically means inexpensive money. And never base today’s borrowing decision on the possibility that tomorrow’s politicians might change the rules.

Government programs can provide a lifeline. Our EIDL certainly helped us when we needed one. But a lifeline can still have a very long rope attached to it. We survived the disaster. Now we’re trying to make sure we survive the disaster loan.