***Disclaimer: What is noted, below, is NOT accounting advice. You must consult your CPA and/or attorney to interpret what is and is not allowed within the EIDL guidelines.***
This is a sequel to my April 2020 blog. The EIDL is provided by the Small Business Administration, which is a U.S. government agency. It was instituted to help alleviate the expected economic distress to small businesses due to the Covid-19 lockdown.
On behalf of one of our companies, which owns the rental properties, I had applied for the EIDL. Here is the sequence of events:
- 03/20/2020: Governor Gretchen Whitmer of Michigan signed an Executive Order, temporarily suspending evictions.
- See the 07/15/2020 entry, below, for the further sequence of events related to EO.
- 04/09/2020: Submitted application for a $10,000 grant.
- The fine print for this grant indicated that it was for $1,000/person for up to 10 people.
- In our case, it would have been for a total of $2,000; i.e., hardly enough to keep our business afloat in the event the worst-case scenario materialized in terms of cash flow.
- 05/02/2020: Received an email from SBA indicating that the application was being processed.
- 06/11/2020: Throughout the day, I received multiple emails and phone calls from SBA, asking for additional pieces of information.
- Interestingly, what was being processed was not for a grant but a loan of a higher amount at an interest rate of 3.75%.
- I was fine with this turn of the event because, frankly, I was not expecting anything at all. I was pleased that it was to be a loan to be paid back to the government with interest. Why?
- With its ever-growing, enormous national debt, the U.S. government is hardly in a position to keep “giving” free money to its citizens. Doing so would be national financial suicide.
- 06/15/2020: The loan was approved.
- 06/16/2020: To comply with SBA requirements, we discussed with our CPA on how to treat the funds – in terms of accounting. (More on this, below.)
- 06/17/2020: The funds were electronically deposited into the company account.
- 06/26/2020: The $2,000 grant, noted above, was deposited into the same business account.
- In contrast to the loan, there was no explanation by the SBA or contract to sign. The money just showed up.
- Our CPA was consulted, once again, just to make sure that this was legitimate.
- 07/15/2020: The executive order, EO 2020-134, was finally rescinded without a replacement executive order. This meant the ability for property owners to evict non-paying tenants was finally back in place.
- The cycle of “a new executive order, immediately following the previous rescission” was repeated four times as follows:
- EO 2020-19, issued on 03/20/2020, was rescinded and ended on 04/17/2020 by EO 2020-54.
- EO 2020-54, issued on 04/17/2020, was rescinded and ended on 05/14/2020 by EO 2020-85.
- EO 2020-85, issued on 05/14/2020, was rescinded and ended on 06/11/2020 by EO 2020-118.
- EO 2020-118, issued on 06/11/2020, was rescinded and finally came to an end on 07/15/2020 by EO 2020-134.
- All in all, at the whim of Governor Whitmer, Michigan property owners had lost the ability to evict non-paying tenants for four months.
- The cycle of “a new executive order, immediately following the previous rescission” was repeated four times as follows:
- 06/15/2021: Loan payment starts. No prepayment penalty.
As noted in the April 2020 blog, initially, I applied for the grant so that we’d be prepared for the “just in case” scenario, which was caused by our governor’s 03/20/2020 edict, making us – rental-property owners – unable to evict non-paying tenants. Translation: If we do not receive rent from the tenants, we would have to somehow come up with funds to continue making the mortgage payments, or default on the loans and possibly be foreclosed on those properties.
Contrary to the original reason for application, however, our CPA clarified that the SBA rules specified that the funds were not allowed to be used to service the existing mortgage debt on rental properties. “What?!” Instead, they were to be applied solely toward operating expenses incurred since January 2020 due to the Covid-19 lockdown.
With this company, on behalf of which I had applied for the EIDL, whenever there was a shortfall for operating expenses, they had been funded by our own funds in the form of Charges Paid By Owner (CPBO) and/or out-of-pocket loans made to the company. Over the years, the monthly funding limits (i.e., Social Security and pension incomes) forced us to cut our operating expenses down to a bare minimum.
Because of the self-funding, the EIDL funds can be used by the company to pay us back, albeit limited solely to those self-funded operating expenses incurred this year. Such refunds, in turn, can then be re-directed any way we choose, including, if necessary, to service the debt. Finally, in a round-about way in terms of accounting, my original reason for applying for the EIDL will be satisfied after all.
- Note: If you have not self-funded shortfalls for operating expenses out of pocket for the calendar year 2020, this would probably not work for you.
According to the SBA, small businesses generate 44% of U.S. economic activity. Collectively, therefore, what happens to each small-business entity impacts a significant portion of the economy.
During the 2008 capital-market crash, the $700 billion taxpayer-funded bailout money stayed within the banking system, never to be distributed to the rest of the economy as it had originally been “intended” by the Obama Administration. This left most of us small-business owners to fend for ourselves to survive. Consequently, many went bankrupt. We survived by allocating major portions of our modest entitlement incomes to keeping our businesses afloat.
In stark contrast, in 2020, this country is being run by a businessman who understands the importance of cash flow for small businesses to survive. What was made available to our company was just enough to help smooth out our cash-flow needs, in case we have to face the worst-case scenario; i.e., continue making mortgage-loan payments to the banks without the corresponding rental income.
Happy investing!
