February 6, 2023

I’m not using my small business loan so I’m earning interest on it

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  • My freelance income didn’t drop much at the start of the pandemic, but I was worried I wouldn’t be able to work as much once I was homeschooling my son, so I took out an Economic Injury Disaster Loan.
  • Right now, I don’t need the loan to keep my business afloat, so I wanted to keep it somewhere where it would earn interest.
  • I considered a CD, but rates aren’t great and my money would be locked away, so I decided on a high-yield savings account where I can access it if I need it.
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This year has been hard on a lot of people, especially small business owners. As someone who owns a freelance writing and content marketing business, I worried that I may lose some clients back in March or simply receive fewer assignments.

Luckily, I was able to weather the storm by switching a few things around in our budget and relying on savings. But once I found out I’d likely be homeschooling my son this year, I looked to the Small Business Administration’s Economic Injury Disaster Loan to provide some extra financial relief.

In July, I heard about the SBA’s Economic Injury Disaster Loans for small businesses and nonprofits. I initially applied for the grant of $1,000 per employee but there was also an option to see if you qualified for the loan.

While the grant funds had just run out, I did hear back that I qualified for the SBA loan.

How the SBA loan program works

The EIDL program is intended to serve small business owners who are experiencing a temporary loss of income due to COVID-19. My clients and business have definitely been affected by COVID-19, and I’ve also missed out on other paying projects due to having to take on other responsibilities like homeschooling my son.

Usually, I’m pretty debt-averse in my financial decisions, but I also have to acknowledge the fact that we are living in pretty strange economic times. 

The EIDL program issues a loan that comes with a fixed 3.75% interest rate for small businesses and a 2.75% interest rate for nonprofits. The repayment term is 30 years, and there are no prepayment penalties or fees.

Collateral is required for loans over $25,000, but I didn’t borrow that much. I settled for a $14,000 loan; what I like about this loan is that payments are deferred for one year (interest still accrues during this time).

What I’m doing with the money

All in all, these loan terms do not seem that bad. I ran some calculations and realized I’m spending around $800 to keep my online business running each month, which is $9,600 per year. Plus, I’m setting aside 25% of my taxes.

In the worst-case scenario, this SBA loan could help me stay afloat for a few months. With my mortgage currently at $1,500 per month, the loan could cover that for at least nine months. 

Right now, the money is there in case I need it to help keep my business running. While my personal emergency fund can help protect my personal expenses, the SBA loan can help me continue to cover business expenses and even invest in ways to potentially grow my business during this time. 

In order to keep earning a profit, I need to make sure expenses like my housing, internet, and other utilities are paid since I work from home. I got approved to borrow much more money, but tried to only borrow what I actually needed.

Where I’m keeping the money

Overall, the SBA loan process was pretty smooth. I applied some time in July and got approved in August. The funds hit my account a few days after getting approved. Then there was the question of where I should actually keep the money.

A friend of mine mentioned they put their SBA loan money into a CD, but I didn’t feel this was the best option. CDs do help grow your money, but they also lock it away for a set timeframe and charge a penalty if you withdraw funds early. With the EIDL program, borrowers must start making payments after 12 months. The average 12-month CD rate is 0.85% APY, and a 24-month CD rate is not much better.

The Federal Reserve slashed interest rates back in April, but they could always go back up in the future. Locking funds in a low-rate CD just doesn’t seem like a good option — especially if it means not being able to take advantage of higher rates in the future.

Current high-yield savings account rates are around the same or a little better (depending on the bank) but don’t lock your money away. This is why I decided to put my SBA loan money into my high-yield savings account. This provides much easier access if I ever do need to draw from the money to cover business expenses.

Plus, it can still earn some interest and I don’t have to deal with any fees or penalties. Most high-yield savings accounts have a lower minimum balance requirement (or no requirement) and no hidden fees.

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