Business loan

I don’t use my small business loan, so I earn interest on it

Personal Finance Insider writes about products, strategies, and advice to help you make smart decisions with your money. We may receive a small commission from our partners, such as American Express, but our reports and recommendations are always independent and objective. Terms apply to offers listed on this page. Read our editorial standards.

  • My freelancing income didn’t drop much at the start of the pandemic, but I was worried that I wouldn’t be able to work as much once I was homeschooled with my son, so I contracted a economic 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 the rates aren’t great and my money would be locked away, so I opted for a high-yield savings account where I can access it if I need to.
  • Sign up to receive the Personal Finance Insider newsletter in your inbox»

This year has been difficult for many people, especially small business owners. As the owner of a freelance content writing and marketing business, I worried about losing clients in March or just getting fewer assignments.

Luckily, I was able to weather the storm by changing a few things in our budget and counting on the savings. But once I found out that I was likely going to homeschool my son this year, I turned to the Small Business Administration’s Economic Disaster Loan to provide additional financial relief.

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

As the grant funds had just run out, I heard that I qualified for the SBA loan.

How the SBA Loan Program Works

The EIDL program is for small business owners experiencing a temporary loss of income due to COVID-19. My clients and business have certainly been impacted by COVID-19, and I’ve also missed out on other paying projects as I had to take on other responsibilities like homeschooling my son.

Usually, I’m quite averse to debt in my financial decisions, but I also have to acknowledge the fact that we’re living in some pretty weird economic times.

The EIDL program issues a loan with a fixed interest rate of 3.75% for small businesses and an interest rate of 2.75% for non-profit organizations. The repayment term is 30 years and there are no penalties or prepayment charges.

Collateral is required for loans over $25,000, but I haven’t borrowed much. I accepted a loan of $14,000; what i like about this loan is that the payments are deferred for one year (interest still accrues during this period).

what i do with the money

All in all, these loan terms don’t seem so bad. I did some math and realized that I was spending around $800 to run my online business every month, or $9,600 a year. Plus, I set aside 25% of my taxes.

In the worst case, 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 run my business. 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 continue to generate profits, I need to ensure that expenses such as my accommodation, internet and other utilities are paid for since I am working from home. I got permission to borrow a lot more money, but I tried to borrow only what I really needed.

where i keep the money

Overall, the SBA loan process was smooth. I applied sometime in July and was approved in August. The funds were released to my account within days of being approved. Then there was the question of where I should actually keep the money.

A friend of mine mentioned that they put their SBA loan money on a CD, but I didn’t think that was the best option. CDs help you grow your money, but they also freeze it for a set period of time 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 isn’t much better.

the


Federal Reserve

cut interest rates in April, but they could still go up in the future. Locking funds into 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 rates for High Yield Savings Accounts are about the same or slightly better (depending on the bank), but don’t lock in your money. That’s why I decided to put the money from my SBA loan into my high-yield savings account. This provides much easier access if I ever need to dip into cash to cover business expenses.

Plus, it can still earn interest and I don’t have to pay any fees or penalties. More


high yield savings accounts

have a lower minimum balance requirement (or no requirement) and no hidden fees.