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How to Compare and Combine the PPP and EIDL for Small Businesses

Smart Summary

  • Though an Economic Injury Disaster Loan is not forgivable like the PPP can be, it can still be a valuable tool to help you survive the pandemic.
  • Many of the typical SBA loan requirements have been waived by the CARES Act during the COVID-19 pandemic.
  • Strategically combining both PPP and EIDL funds can drastically improve cash flow for small businesses.

In a previous article, I outlined cash access strategies for Ohio small businesses and identified both PPP and EIDL as potential sources of cash.

Over the past few weeks, most small business owners (and their bankers) have been scrambling to access the newly passed Paycheck Protection Program (the “PPP”). The PPP was enacted as part of the CARES Act and essentially allows small business owners to receive a loan in the amount of 2.5 times their average monthly payroll costs for the year before their application. If certain conditions are followed, such as maintaining payroll levels as compared to a historical period and spending the funds exclusively on payroll costs, mortgage interest, utilities, and rent, then the loan is forgiven at the end of the 8-week period after the funds are disbursed. Not surprisingly, many savvy small business owners have moved quickly to take advantage of this program. Applications are being accepted as of this week and funds should be disbursed relatively soon. Now that the PPP process has taken shape and applications are starting to flow, let’s learn about another important potential source of cash flow: the EIDL.

Although Economic Injury Disaster Loans (or “EIDLs”) do not offer the opportunity for “free money” like the PPP, the terms of EIDLs from the Small Business Administration (“SBA”) are extremely favorable and strategically combining the PPP and EIDL can be a smart strategy to sustain cash flow.

EIDL Overview

Who is eligible? 
Generally, small businesses, sole proprietors, independent contractors, ESOPs, small agricultural cooperatives, tribal small business concerns, and most private nonprofit organizations physically located (i.e. not a P.O. Box) in declared disaster areas. “Small businesses” essentially means those having fewer than 500 employees; however, businesses in some industries may qualify as small businesses even if they have more than 500 employees. You should check the SBA’s size standards to determine if your business is a “small business.” As of the writing of this article, all states have been declared disaster areas.

Who is ineligible?
Ineligible entities include agricultural enterprises, religious organizations, charitable organizations, gambling concerns, casinos, racetracks, and others.

How much can I borrow ?
Up to $2 million. The exact amount is determined based on the size and type of business, as well as the business’s financial resources.

Do I have to take the entire amount ?
No. If you are approved for a larger amount than you would like to use, there is no obligation to take the full amount.

What are the terms?
The loans may be repaid over a period of up to 30 years. Small businesses will be subject to an interest rate of 3.75% and private non-profits will be subject to an interest rate of 2.75%.

How can I use the funds ?
The funds may be used for fixed debts, payroll costs, accounts payable, and bills that could have been paid if not for the COVID-19 outbreak.

Where can I apply?
Applications can be filed online with the SBA.

What documents will I need ?
You will need:

  1. the SBA Loan Application (SBA Form 5 or 5C);
  2. a Schedule of Liabilities (SBA Form 2202);
  3. normally, Personal Financial Statements for each owner (SBA Form 413), but the CARES Act also waived the personal guaranty requirements for loans of $200,000 or less, so this will not likely be required for loans under this threshold;
  4. normally, a Tax Information Authorization form (IRS Form 4506T), but the CARES Act waived any requirements that the SBA review tax returns, so this will not likely be required; and
  5. normally, complete copies of the company’s most recent Federal Income Tax Return, but the CARES Act also waived any requirements that the SBA review tax returns, so this will also not likely be required.

Anything else I should know ? As part of the CARES Act, Congress authorized the SBA to provide for a $10,000 loan advance following a successful application. There is no obligation to repay the loan advance, even if the application is subsequently denied.

Benefits of a PPP Loan vs. an EIDL

There are several important differences between EIDLs and loans issued under the PPP.

Source of Loan Funds Directly from the U.S. Treasury; application through the SBA. Loans issued directly by conduit banks; application through local banks.
Collateral May be unsecured up to $25,000; will not be declined for insufficient collateral, though SBA will seek collateral, including real estate when available. No security required.
Personal Guaranty Typically required by SBA, but the CARES Act eliminated the personal guaranty requirement if the loan is less than $200,000. None.
Credit History Requires acceptable credit history, though the CARES Act mandates that the SBA may only to the applicant’s credit score or other alternative appropriate methods to determine ability to repay. No threshold for credit history.
Credit Elsewhere No alternative sourcing efforts required.

The CARES Act has waived the typical requirement for an EIDL applicant to prove to the SBA an inability to obtain all or some requested funding from other sources without incurring undue hardship.

No alternative sourcing efforts required.
Affiliation Rules Requires applicants to include employees of “affiliates” in determining the number of employees for eligibility purposes. Requires applicants to include employees of “affiliates” in determining the number of employees for eligibility purposes; though franchises and businesses with NAICS codes beginning with 72 are exempt.
Use of Funds Allows for broad use of funds, including fixed debts, payroll costs, accounts payable, and bills that could have been paid if not for the COVID-19 outbreak. Funds may generally be used for payroll support, health insurance premiums, interest on mortgages and pre-existing debts, rent, utilities, and refinances of EIDLs received after Jan. 31, 2020.
Forgiveness No forgiveness available. Loan terms are generally 30 years at an interest rate of 3.75% for small businesses and 2.75% for nonprofits. If the borrower maintains payroll levels as compared to a historical period, then most of the loan amount may be forgiven. The amount that is not forgiven becomes a loan that must be repaid in 2 years at an interest rate of 1.0%

How Can I Use Both Loans ?

One of the most common questions asked by businesses is whether they can participate in both loan programs in order to maximize cash flow. The answer is yes- the PPP explicitly allows for use of EIDLs, so long as they are not used for the same purpose .

Both programs allow for a borrower to use the proceeds for some of the same purposes. However, only the PPP allows for portions to be forgiven after the proceeds have been used for this purpose. A smart strategy for small business owners looking to supplement cash flow would be for the small business owner to use PPP funds for all permitted expenses under the PPP. For other expenses that may not be covered by PPP funds, use an EIDL as a supplement.

Although the PPP is likely a once-in-a-lifetime opportunity, its uses are limited. Using proceeds from an EIDL to cover inventory, advertising costs, or other accounts payable necessary to operate the business allows a small business to take advantage of both programs to increase cash flow during the COVID-19 outbreak. So long as the use of the funds from each program is not the same, then a savvy small business owner can take full advantage of this strategy to have payroll costs, mortgage interest, rent, utilities, inventory, accounts receivable, and other obligations that would have been paid but for the COVID-19 outbreak to be covered under both of these SBA programs.

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