Comparing the SBA’s Economic Injury Disaster Loan and Paycheck Protection Programs

Providing financial assistance to small businesses is one of the key roles played by the Small Business Administration (SBA), including the provision of emergency loans during times of crisis under its Economic Injury Disaster Loan (EIDL) program. When the Coronavirus Aid Relief and Economic Security Act (CARES Act or Act) was passed on March 27th, certain components of the EIDL program were enhanced under the Act, and an additional SBA section 7(a) lending program – the Paycheck Protection Program (PPP) – was introduced. Deciding which loan program is right for your business depends primarily on how you plan to use the proceeds of the loan.

How will the funds be used?
The PPP offers loans up to $10M for businesses to use mostly (at least 75%) for “Payroll” expenses, which include:

• wages, salaries, tips


• state and local payroll/employment taxes, and


• health & retirement benefits paid to employees (collectively capped at $100k per employee, including the owner).
  Note: the definition of “Payroll” is slightly different for the self-employed and independent contractors.

Under the EIDL, loan proceeds of up to $2M can be used more broadly, for other urgent needs beyond payroll, such as:

• increased production costs due to supply chain disruption, and


• payment of ordinary legitimate business expenses like utilities and fixed loan payments.

Despite the advantage of broader use, EIDL funds have a higher interest rate and lower maximum loan amount, and they must be repaid sooner than PPP loans.

Summary of key provisions:
Below is a summary of the key provisions under each program to help you choose the right one for your business. Please keep in mind that this chart does not summarize every provision and requirement of each loan program, and the details and requirements as presented here may change. We recommend that you contact a lawyer and/or tax advisor before applying for either loan. 

 

EIDL = Economic Injury Disaster Loan

PPP = Paycheck Protection Program


Eligibility

Business entities up to 500; sole proprietors, independent contractors, self-employed;

Been in business since Jan 31, 2020

Business entities up to 500 employees total (for restaurants, hotels, franchises and certain religious organizations, 500 per location); sole proprietors, independent contractors, self-employed.

Been in business since Feb 15, 2020

Maximum Loan Amount

Up to $2M, calculated by looking at 3-6 months’ worth of payroll + rent + fixed loan payments + utilities.

 

(Number of months depends on industry)

Up to $10M, calculated by looking at 2.5 times average monthly Payroll (as defined above) for FY 2019

 

(exceptions for seasonal businesses)

Usage
Fixed Debts, payroll and related benefits, accounts payable and other expenses that cannot be paid because of the disaster’s impact

Payroll and related benefits, interest on mortgage payments for other debts (not principal), rent and utilities

(Non-Payroll amounts cannot exceed 25%)

Loan terms

3.75%   (2.75% for non-profits)

Up to 30 years

6-12 month deferral before 1st payment due

Exact terms depend on borrower’s ability to pay

No prepayment penalty

No collateral required

No personal guarantee required if under $200k

1%

2 years

6 month deferral before 1st payment due (interest accrues)

No prepayment penalty

No collateral required

No personal guarantee required

Advance / Loan forgiveness (tax free)

You can request an immediate advance up to $10k (supposedly within 3 days, although it is not clear it will actually be disbursed that quickly); this advance does not have to be repaid. Although it is not expressly called loan “forgiveness,” that is the practical effect of this “advance” since it does not have to be repaid.

The advance “may be used to keep employees on payroll, pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments.”

Up to 8 weeks’ worth of: Payroll (as defined above) + mortgage interest + rent + utilities. (Non-payroll amounts cannot exceed 25%).

 

This is to be used to keep your employees employed and not on unemployment, so the forgiveness amount is reduced if your headcount has decreased recently, or if you have recently cut salaries more than 25% for those making under $100k

How to Apply
From the SBA directly using its application form. 

 

At an SBA-approved lender using the SBA’s application form.
Note: another PPP application designed specifically for independent contractors and self-employed individuals will become available on Friday, April 10.

 

In light of these differences, the PPP might be best for your business if you

• need money mostly for payroll (to keep existing employees),


• can wait a little longer to get the cash,


• don’t mind that the term length is much shorter


• need more than the $2mil max under EIDL

On the other hand, the EIDL might be best for your company if you

• need the $10,000 Advance very quickly


• need it for more than just payroll


• don’t mind that the loan is at a higher interest rate nor that max loan amount is lower

Can Businesses Obtain Funds under both PPP and EIDL?
It is possible to apply for and accept funding under both programs, as long as the loan proceeds are not used to fund the same needs. In this situation, any forgiveness under one program will be deducted from your eligible forgiveness under the other. If you applied under the EIDL first, but would like to take advantage of the PPP’s lower interest rate, it is also possible to rollover your EIDL loan into a PPP.

If my business applies for a loan, must it accept the proceeds?
No.  Finally, it is important to point out that you are not obligated to take a loan after applying for it. You can always decline the bank’s lending offer after receiving an approval.

Should I seek the assistance of a tax and legal advisor about these loan options?
Yes.  In addition to the above terms, borrowers should consider the tax implications, including available tax credits, of each loan program with the help of their tax advisor the information here is a very short summary and is not intended as either legal or tax advice.

If you are interested in discussing loan options for your business during this challenging time, or for other general business questions, please contact Brian Heller at [email protected] or (202) 365-3940. 

Brian Heller is a Member of Outside GC’s Washington D.C.-based team, and is an experienced technology and deal attorney, specializing in SaaS software licensing, Virtual Reality (VR) products and services, digital and social media, online advertising, mobile apps, cloud services, terms of use, data use and protection and content licensing. Brian has represented both vendors and customers and uses this experience to present reasonable positions on behalf of his clients. Brian can be reached at [email protected].