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Two Lending/Grant Programs Your Business Must Review Quickly: The Paycheck Protection Program and Economic Injury Disaster Loan

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  Title I of the CARES Act creates a $349 billion Paycheck Protection Program (PPP) through the Small Business Administration (SBA) who will make or guarantee loans of up to $10 million to eligible entities. Additionally the CARES Act is providing $10 billion to the SBA for grants offered through Economic Injury Disaster Loans. Both the PPP loans and SBA grants are first come first serve.

Economic Injury Disaster Loans and Emergency Grants

The SBA offers Economic Injury Disaster Loans (EIDL) which provides loans up to $2 million with a 30 year term. The rates are set at 3.75% for small businesses, and 2.75% for non-profits. Ten billion dollars in emergency grants from the SBA are included as part of the CARES Act.

The EIDL includes a loan advance (Emergency Grant) up to $10,000 and it is provided within three days of submitting an SBA loan application for eligible entities. The $10,000 advance on the loan does not need to be repaid. [1] Additionally, loan payments may be deferred for up to 4 years. [2] Please note, the EIDL program is separate from the PPP and has different definitions and terms.

Eligible entities include small businesses, sole proprietors, private non-profits, independent contractors, cooperatives, ESOPs, and tribal units that employ under 500 employees that apply for loans in response to the COVID-19. The lender for EIDLs is the SBA. To apply for a COVID-19 Economic Injury Disaster Loan, click here.

Loan advances are available for EIDL loans made between January 31, and December 31, 2020. The funds can be used for:

  • Providing paid sick leave for employees unable to work due to the direct effect of COVID-19,
  • Maintaining payroll to retain employees during the disruption
  • Meeting increased costs to obtain materials
  • Making rent or mortgage payments
  • Repaying obligations that cannot be met due to revenue losses

Paycheck Protection Program

The PPP loan is designed to incentive small businesses to keep workers on their payroll. Eligible entities include small businesses, Veterans organizations, sole proprietors, eligible non-profits, self-employed and independent contractors, and Tribal concerns that employ under 500 employees. Businesses in certain industries with more than 500 employees may also apply if the meet the SBA’s size standards.

To apply, the entities must have been operational by February 15, 2020, had payroll, and paid taxes. The time period coverable by the loan is February 15 through June 30, 2020. [3] The proceeds of the loan must be used to retain employees and make payroll. The maximum loan amount is 2.5 times the average monthly payroll costs for the same period the year prior. [4] Lenders will begin taking applications starting April 3, 2020. The SBA provides a sample form that borrowers can use to help them prepare for the application process.

Borrowers may use the PPP loan to cover items such as:

  • Payroll costs
  • Employee salaries (does not include employee or owner compensation over $100k)
  • Group health care and insurance premiums
  • Mortgage premiums, and other specified debt obligations
  • Rent and Utilities

Loan payments will be deferred for 6 months. The loan has a maturity of 2 years and an interest rate of 1%. [5] Loan forgiveness is available for costs spent on payroll, insurance benefits, mortgage interest, rent, and utilities during the 8-week period following the origination date of the loan. The amount forgiven is reduced if the business has reductions in workforce compared to the same period of the previous year. Non payroll expenses will be capped at 25% of payroll (i.e. if payroll is $75 then can only get forgiven for $25 of rent, interest on mortgage, utilities, etc.).

While independent contractors can apply for a PPP loan, they do not count as employees for the purpose of loan forgiveness. Final guidance can be reviewed here.

Which Loan to Apply for?

Businesses can take out both types of loans as long as the disaster loan is not used for the same purpose as the PPP loan. If a borrower accepts an EIDL loan and then qualifies for a PPP loan, they can refinance the EIDL loan into the PPP loan. [6] The advanced amount received from the EIDL program would be subtracted from the amount forgiven in the PPP loan. [7]



Sources:

[1] “Coronavirus (COVID-19) SBA Disaster Assistance in Response to the Coronavirus,” SBA.gov, n.d., (Source)
[2] “The Small Business Owner’s Guide to the CARES Act,” Angel Capital Association, March 27, 2020, (Source)
[3] “Congress Creates the Paycheck Protection Program Through the SBA to Provide Loans and a Loan Forgiveness Program to Eligible Entities Impacted by COVID-19,” Vorys, March 20, 2020, (Source)
[4] “Coronavirus Aid, Relief, and Economic Security Act (CARES Act): Relief for Small Businesses,” ADP Research Institute, April 1, 2020, (Source)
[5] “Paycheck Protection Program (PPP),” SBA.gov, n.d., (Source)
[6] Paren Knadjian, “The Economic Injury Disaster Loan (EIDL) Program vs The Paycheck Protection Program (PPP),” KROST, April 1, 2020, (Source)
[7] “Coronavirus Aid…,” ADP Research Institute, April 1, 2020, (Source)
Additional: “COVID-19 Business Recovery Resource Center,” Ohio University, n.d., (Source)
Additional: “Small Business Administration (SBA) COVID-19 Loans,” ESD.NY.gov, n.d., (Source)

Posted in: Business Owners

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