The Last of the Spirits, from Charles Dickens: A Christmas Carol. In Prose. Being a Ghost Story of Christmas. With Illustrations by John Leech. London: Chapman & Hall, 1843. First edition. Public domain
CEDF Business Advisors told all of their clients to apply for all of the COVID assistance programs, such as the Economic Injury Disaster Loan, and most acted on this advice to maintain liquidity. Who could say how long this crisis would continue?
The great majority were approved in the EIDL program for generous amounts up to the $150,000 cap imposed by the SBA. This brought emotional relief to some who had the mindset that the interest rate of 3.75% and the 30 year repayment terms meant the loan payment would be affordable, especially considering that the first payment wasn’t due for 12 months. Surely, we would find our way out of the crisis by next year.
For some others, this extra business oxygen surprisingly caused a minor asthma attack. Their plan had been to get out of debt (meaning CEDF and other business financing) as soon as possible in the years ahead. But now a 30-year loan sounded like a debtors prison sentence.
With sincere sympathy for those who are still struggling to get their revenues back to pre-COVID levels, a little perspective is important to feel better about the strategy to take the assistance.
First of all, small business lending was never easy to obtain before the crisis and many companies that were close to being bankable before March of 2020 probably slipped backwards since. The idea that there would be other, better options later was a bad bet this spring and the idea doesn’t look any more plausible five months later.
Let’s create an example that a business accepted a $50,000 EIDL loan and that it is going to take five years to recover to the point where they can pay back the loan in full. Let’s hope nobody will really take 30 years. We’ll use round figures to simplify the illustration. Over that time, making the $231 per month payment beginning next summer, the total five year interest will be around $8,900.
To paraphrase Charles Dickens, if the Ghost of Business Future visited you and said you could save your enterprise by paying less than $1,800 in interest on this financing every year for five years, would you take the deal?
May every business owner in this situation enjoy a fat Christmas goose of profit over the next five years to retire the remaining $45,000 of principal on the EIDL loan that would be due around the 60 month mark.
Of course, we can’t predict the exact outcome of this crisis. But, business owners for the most part are an optimistic lot willing to face uncertainty and take risk. Most are willing to accept the reality that their goose would have been cooked without the assistance programs and the additional debt in the near term is reasonable when they are playing the long game in business.