SBA EIDL Loans to Nonprofits: Workout Strategies, Treasury Risk, and Bankruptcy Options

At Shenwick & Associates, we are seeing a sharp increase in nonprofit borrowers seeking relief from COVID-19 Economic Injury Disaster Loans (EIDL). Unlike traditional commercial workouts, there is no standardized SBA workout program for nonprofit EIDL borrowers. The result is an opaque, discretionary process that requires a disciplined, well-documented approach.
This post outlines the available paths: out-of-court workouts with the SBA, Treasury referral issues, and bankruptcy as a last resort.

I. Statutory Framework and Loan Characteristics
EIDL loans were issued under 15 U.S.C. § 636(b)(2). For nonprofit entities, these loans typically:
Did not require personal guarantees (contrast with for-profit borrowers  with SBA EIDL loans over $200,000.00)
May or may not be secured, depending on loan size and documentation.
Once in default, the SBA has authority to pursue administrative collection, including referral to Treasury for offset under 31 U.S.C. § 3716.

II. No Formal “Workout Program” — Practical Reality
There is no codified EIDL modification program. Instead:
Borrowers must request relief directly from SBA servicing.
The SBA’s institutional position is to seek full repayment.
Concessions are discretionary and heavily documentation-driven.
Despite this, the SBA has continued to consider hardship-based modifications prior to Treasury referral.

III. Core Workout Strategy (Pre-Treasury)
The primary opportunity is an out-of-court loan modification.
Required submission typically includes:
Current financial statements (balance sheet and P&L).
Cash flow projections.
Last three years of IRS Form 990.
Board resolution authorizing negotiations.
Narrative explaining financial distress and mission impact.
Effective requests include:
Temporary reduced payments.
Interest-only periods.
Six-month review/reset periods.
Re-amortization where permitted.
The key leverage point is demonstrating that enforced collection will impair a functioning public-benefit mission.

IV. Distressed but Viable Nonprofits: Structured Workout Package
Where the nonprofit is insolvent but operational, a formal workout package should be submitted:
Narrative:
Cause of revenue decline.
Current programming and beneficiaries served.
Public harm resulting from liquidation.
Financials:
Three years of Form 990.
Current balance sheet and income statement.
Cash flow projections.
Settlement Proposal:
Lump-sum payment (often donor-funded).
Discounted payoff.
Structured settlement over time.

V. Treasury Referral: Escalated Risk
Recent SBA activity reflects aggressive referral of delinquent EIDL loans to Treasury.
Consequences include:
Administrative offset (tax refunds, federal payments).
Additional fees and penalties.
Loss of direct negotiation access with SBA servicing.
Critical objectives at this stage:
Obtain and verify the Treasury balance.
Challenge improper fees or accounting errors.
Attempt to recall or return the loan to SBA servicing.

VI. Bankruptcy Considerations
When workouts fail, bankruptcy becomes the final option.
Chapter 11:
Allows nonprofit reorganization and continued operations.
SBA debt can be restructured through a plan.
Chapter 7:
Provides liquidation.
EIDL obligations are dischargeable as unsecured federal debt.
Secured collateral, if any, will be administered for the benefit of the SBA.
Unlike for-profit borrowers, the absence of personal guarantees limits guarantor exposure.

Early engagement with SBA servicing materially improves outcomes and can prevent a referral to Treasury.

A structured, evidence-based submission is essential.

Treasury referral significantly reduces flexibility.

Bankruptcy remains a viable but last-resort tool, particularly where mission preservation is not feasible.

Shenwick & Associates continues to advise nonprofit borrowers navigating these issues, with a focus on pre-Treasury resolution and strategic positioning for compromise.

Jim Shenwick, Esq  917 363 3391  jshenwick@gmail.com 
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