The COVID-19 pandemic that has swept through the globe this year has changed the way of living for many people, including small business owners all over the country. Many small businesses have been forced to shut their doors or operate remotely, as 95% of Americans are currently under some sort of stay-at-home order.
For many small business owners, the concern over funding is very real. Some businesses won’t be able to re-open after this pandemic is over, while others may struggle to stay afloat for quite some time.
Thankfully, the government has taken action to help small business owners across the country with two different types of loans. Let’s look at how the programs compare, and which one might benefit your business the most.
Economic Injury Disaster Loan Assistance Introduced
The Small Business Administration (SBA) developed the Economic Injury Disaster Loan (EIDL) shortly after a national emergency was declared due to COVID-19. An EIDL loan can be used to advance a small business the money they need to cover expenses during this time of emergency until they are up and running again.
On March 27th, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES) into law.
This law introduced a Paycheck Protection Program (PPP) that offers small businesses up to $349 billion in authorized government loans if they qualify.
So, which one would be most beneficial to your business to move your business forward? Let’s compare the two to determine the type of help that will best fit your needs.
EIDL vs. the Paycheck Protection Program
First, let’s look at the main differences between these two programs. It’s important to note that you can apply for both. If you accept an EIDL loan, and you qualify for the PPP, you can choose to refinance the EIDL with the money from the PPP.
A recent survey of small business owners showed that about 85% of them planned on applying for both.
The main differences between an EIDL and the PPP are all in the details, but it’s not as complicated as it may seem. Let’s dive deeper into some of the most fundamental questions and break down the differences.
Trying to find which loan option is right for you? The Loans Brother from Mares Mortgage can help
Who Is the Lender?
The lender for all EIDLs is the Small Business Administration. Many people don’t know that the SBA is actually an independent agency within the federal government, which allows them to provide EDILs to businesses in need without having to have anything signed into law.
The SBA works with lenders to get money directly to small businesses in times of disaster. The disaster loans given by the SBA can be used toward a variety of things, including economic injury. You can apply directly for an EIDL for your business on the SBA’s website. As of April 18, 2020, they have reached capacity for applications, but as more funding becomes available, that may change.
With a PPP loan, the lender can be either any bank or institution that has already been approved by the SBA or:
- A federally-insured depository institution
- A federally-insured credit union
- A Farm Credit System
The number of lenders for a PPP loan can change every day and continue to increase as other regulated lenders are approved, and then enrolled in the program. These continually-approved lenders are needed to meet the current demands of businesses in dire need of funding to stay afloat. You can personally consult with local lenders nearby to ask whether they are participating in the program. Using a local lender can be easier for many businesses when it comes to staying in communication, and having the ability to get questions answered quickly.
When Can I Apply?
Since the SBA is always available to offer loans to small businesses, you can apply at any time! Disaster loans cover a variety of different issues, not just economic injury. They can be used for equipment, real estate, and more. Because of that, you can apply immediately (or as soon as the application becomes available again).
If you haven’t been able to apply for your EIDC loan yet, keep checking back with the SBA’s website. They may re-open the ability to apply for small businesses when more funds are allocated or when additional terms for the CARES act are also signed into law.
If you haven’t yet applied for a PPP, you’ve already surpassed the initial ‘start dates,’ which were April 3, 2020, for small businesses and sole proprietorships, and April 10, 2020, for the self-employed.
As stated above, other regulated lenders will continue to enroll in the program. As they are approved, because these initial dates have already passed, you should be able to apply for your PPP loan right away once the application system opens up once again. Right now, it’s all about allocating more funds because so many small businesses are asking for help. So, it’s less about when you can apply, and more about how long you might have to wait.
Who Can Apply?
There are some overlaps when it comes to which type of loan you should apply for. As suggested earlier, many businesses will be able to utilize both, depending on the type of business you operate, as well as the size. A wide variety of companies can apply for an EIDL, including:
- Businesses with under 500 employees
- Sole proprietors/independent contractors
- A cooperative with under 500 employees
- An employee stock ownership plan with under 500 employees
- A tribal small business concern with under 500 employees
- Small nurseries or agricultural cooperatives
- Private non-profit organizations with tax exemptions
- Businesses with over 500 employees that are still considered small by SBA standards
The rules for who can apply for a PPP are very similar, with a few additions.
Your business had to have been in operation as of February 15, 2020. You can also apply if you have multiple business locations with 500 or fewer employees that have been assigned a NAICS code beginning with 72. This applies to hotels and restaurants for which affiliation rules have been waived.
What Are the Rules?
The affiliation rules are essential to understand when working with the SBA for an EIDL. The SBA decides which businesses are considered “small,” and that affiliation typically exists when a company either controls or can control another. It can also exist when either one or more third-party controls in both businesses.
For the PPP Program, some of the affiliation rules have been waived due to the circumstances of this disaster. Affiliation rules for hotels and restaurants have been waived, and the definition has been changed to 500 employees per each location.
They have also been waived for those businesses that operate as a franchise or those that have been given a franchise code by the SBA.
If your company receives any funding through a small business investment company, affiliation rules are also waived when you apply for a PPP.
What is the Maximum Loan Amount?
Because the SBA understands the dire need for businesses to get funding now, they are offering loan amounts of up to $2 million. Businesses can ask for an advancement of up to $10,000, which will be distributed within three days. If you apply for the advance and don’t qualify, you won’t be required to pay it back.
When you apply using the PPP program, the maximum loan amount you can receive is $10 million. However, you are required to follow a specific equation when it comes to the loan amount you’ll receive.
If your business were in operation between February 15, 2019-June 30, 2019, the maximum amount you’ll be able to receive would be 2.5 times your monthly payroll costs 12 months before your application submission. If you were not in business during that period, you could receive 2.5 times your monthly payroll costs between January 1, 2020-February 29, 2020.
You could refinance an existing EIDL loan into a PPP loan if you took it out between February 15, 2020-June 30, 2020.
What is the Annual Interest Rate?
The interest rates are one of the largest areas of differentiation between these two programs. The interest rates for an EIDL are 3.75% for businesses and 2.75% for nonprofit organizations. That may seem like a lot, especially for nonprofits who may especially be hurting during this economic crisis. But, thanks to its advancement option, it’s more important to most business owners and nonprofit organizations to have money now to keep their business afloat.
Once things start to balance out again, repaying your EIDL will seem like a small price to pay for being able to keep your business alive during the pandemic.
In order to provide a bit of extra relief to small businesses, the PPP program’s interest rate is only 1% for the unforgiven portion of the loan. We’ll touch more on the loan forgiveness options in a few sections. This gives business owners an easier opportunity to pay back their loan faster and with less of a burden to their bottom line, but you may not get the money as quickly as you will with an advance from an EIDL.
What is the Term of the Loan?
An EIDL is more like a traditional loan. The term can be up to 30 years, giving you plenty of time to be able to pay back whatever you had to apply for. Keep in mind, though, that factoring in a higher interest rate needs to be a part of your repayment plan. The economy may not be on solid ground for quite some time once things begin to re-open, so it’s crucial to think about your long-term growth plan and how you plan to pay back your loan quickly.
When it comes to the term of the PPP program loan, you’ll have two years to pay off the unforgiven portion. That doesn’t seem like much time, but your interest rate won’t impact things as much, so you can apply more money to your principal each month. There are no prepayment penalties to worry about, so you can pay the loan off before the two-year mark if you’re able.
When is the First Loan Payment Due?
Both programs are meant to help small businesses immediately during this time of national emergency, so you won’t be expected to pay your loan back right away. If you take an EIDL loan, the first payment is due a year after the origination date. While that gives you plenty of time to get back on your feet, don’t forget that interest is accrued throughout the deferment, adding to your payment.
The first payment for a PPP is due at least six months after the loan is originated. Like the EIDL, interest is also still accrued during the deferment, but again, it’s only 1%, so it may not be as big of a burden for businesses to wait the full six months before making that initial payment.
What Can the Loan Be Used For?
The SBA issues EIDL loans to businesses that need to cover any of their financial obligations and expenses to operate. These expenses and obligations would have been able to be met had a disaster not occurred. It’s not a loan for businesses that were not able to cover their operating expenses before the Coronavirus pandemic.
With the PPP program, the loan can be used to:
- Cover employee salaries or compensations (payroll costs)
- Cover health insurance premiums
- Make payments of interest on a mortgage obligation for the business
- Pay rent
- Pay utility bills
- Cover interest payments on any other debt incurred by your business before the COVID-19 pandemic
If you’re not sure what qualifies as payroll costs, they include salaries, wages, commissions, and tips. They also include both state and local taxes that are assessed on employee compensation. If you’re an independent contractor, payroll costs include any income or net earnings from your self-employment, capped at $100,000.
Is There a Loan Forgiveness Program?
This is another area that can make it easier to decide which loan is right for your business. The EIDL does not have a loan forgiveness program. You must pay off your borrowed amount within the term of the loan, including all accrued interest.
The PPP does offer loan forgiveness. It is calculated by determining the amount spent on any of the permitted costs (listed earlier) by the borrower for eight weeks after the loan begins. As a reminder, all terms of repayment still apply on any portion of the loan that isn’t forgiven.
What Reduces Forgiveness?
Since there isn’t a forgiveness program with an EIDL, this question doesn’t apply.
With the PPP program, there are a few vital forgiveness reduction rules to keep in mind. First, if you decide to decrease the number of full-time employees you have on staff, your forgiveness amount will be reduced. According to the U.S. Treasury will also be reduced if you decrease any of your employees’ salaries by more than 25% if they make less than $100,000 per year.
You can avoid these reductions if you choose to re-hire your staff and restore their salary levels before June 30th, 2020.
The Loans Brother from Mares Mortgage can show you different loan options to get the house of your dreams
How Do I Get Forgiveness?
Again, as EIDLs don’t offer loan forgiveness, this question doesn’t apply.
You will have to request forgiveness on a PPP loan. You can do so by sending in a request to the lender, including documentation that supports how many full-time employees you have on staff, as well as their salaries. You will also need to include things like your mortgage/lease payments and utility obligations, certifying within your request that the documents are authentic. Once the lender receives your forgiveness request, they will have to decide within 60 days.
Which Loan is Right for You?
As one final piece of information to keep in mind, it’s essential to know that there is some collateral involvement with EIDL loans. The SBA will put a UCC lien on your business’ assets. If you receive a loan from the PPP program, you don’t have to worry about collateral.
As you can see, there are many factors to consider when it comes time to decide if you should apply for an EIDL or PPP loan (or both!). At Mares Mortgage, we’re happy to give you more information about your lending options during this trying time for businesses and individuals alike. We hope this article has given you more transparent information about the differences between EIDLs and PPP loans. Understand that individual loan terms will be created by whatever lender you choose, so be sure you’re working with a lender you trust and one that is willing to communicate with you about their expectations.
Feel free to contact us today with any questions you may have about direct lending and how it can have a positive impact on your business right now, and in the coming months as you work to keep things running. No small business deserves to close its doors for good because of this pandemic. We’re all in this together, and we can all work together to help small businesses thrive once this is over.
Related: Questions to Ask a Mortgage Lender