As a result of the COVID-19 pandemic, the Federal government, by congressional approval, released aid packages through the Small Business Administration (SBA) to combat the business disruption that is a result of quarantine and business closure mandates instituted across the nation. Many businesses in the middle market must decide whether an Emergency Injury Disaster Loan (EIDL) or the Paycheck Protection Program (PPP) is the most beneficial for their current situation.
An EIDL may be used for a broader range of expenses whereas companies may borrow a larger amount under the PPP loan, but these funds must be used for payroll related expenses, rent, utilities, and mortgage interest in order to be forgiven. If you have previously been awarded an EIDL and would like to participate in the PPP, you may refinance the EIDL into a PPP loan.
In order to help you make the most informed decision, Larx Advisors summarized the key points in the table below. It is important to note that taking any form of debt, with or without a forgiveness provision, is a risk and should only be undertaken after thoughtful consideration and consultation.
| PPP | EIDL | |
| Interest Rate | 1.0% (as of April 2, 2020) | 3.75% (2.75% for non-profits) |
| Term | 2 years | Up to 30 years |
| Lender | Banks which provide SBA 7(a) loans | The Small Business Administration (SBA) |
| Amount Offered | 250% of the average monthly payroll costs for the twelve months prior to origination (cap of $10 million)* | Up to $2 million |
| Application Timeline | Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders. Timelines may vary by lender. | 2-3 weeks to process and an additional week for funding |
| Secured or Unsecured | Unsecured | Secured by a UCC lien on the assets of the business |
| Payment Deferment Period | 6 months from origination | 1 year from origination |
| Guarantor | Government backed (100% through December 31, 2020. After this date, the guarantee percentages will return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000) | None |
| Permitted Uses | Payroll expenses (including healthcare), rent, utilities, and mortgage interest (no loan proceeds may be used to pay off principal on a mortgage) in order to be forgiven | Financial obligations and operating expenses which the business could have met in the absence of the disaster |
| Loan Forgiveness Program | Yes, up to 8 weeks of payroll expenses, and expenses related to rent, utilities, and mortgage interest agreements in effect prior to February 15, 2020 may be forgiven.** | No |
| Tax Provision | Forgiveness will not be counted as cancellation of indebtedness with regards to federal income tax filings. | N/A |
| Qualifying Businesses | Businesses with under 500 employees and in operation prior to February 15, 2020 (some exceptions for food service and franchise businesses) | Most businesses with under 500 employees and under $35 million in annual revenue will qualify |
| Additional Application Information | You can apply through any existing SBA lender or through any lending institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. Visit www.sba.gov for a list of SBA lenders. | You may currently apply and will be granted a 60-day review period. There is no obligation to accept a loan offer. |
| Notes | Interest will accrue during the deferment period. Seasonal businesses are permitted to use the period February 15, 2019 – June 30, 2019 or March 1, 2019 – June 30, 2019 to determine the average payroll number that will be used to calculate their loan amount. Those who took out an EIDL loan between February 15, 2020 and June 30, 2020 and would like to refinance that loan into a PPP loan may add the outstanding loan amount to the “payroll” sum.*Employee salary in excess of $100,000, FICA and income tax withholdings, and pay for foreign employees must be excluded from your calculation of payroll costs.**The amount forgiven is reduced if any employee making less than $100,000 per year has their salary reduced by over 25% as compared to the most recent full quarter. The amount forgiven is also reduced based on failure to maintain the average number of full-time equivalent employees versus the period from either February 15, 2019, through June 30, 2019, or January 1, 2020, through February 29, 2020. The borrower may select which period to use for the calculation, and there are additional exceptions for seasonal businesses. If number of employees or compensation were reduced between February 15, 2020, and 30 days after enactment of the CARES Act, most will be overlooked if reversed by June 30, 2020. | Interest will accrue during the deferment period. An advance of $10,000 may be requested upon applying which will be delivered within 3 days and does not have to be repaid if the borrower is denied a loan. |
| Application Link | Form to submit to approved lenders:https://www.sba.gov/funding-programs/loans/paycheck-protection-program-pppTreasury Department Application Guidelines:https://home.treasury.gov/system/files/136/PPP%20Borrower%20Information%20Fact%20Sheet.pdf | https://covid19relief.sba.gov/#/ |
Disclosure: Larx Advisors is providing this information for the benefit of affected businesses and readers; however, loan terms will ultimately be decided by the lenders and are subject to change.
Sources:
https://www.congress.gov/bill/116th-congress/senate-bill/3548/text
https://www.sba.gov/funding-programs/disaster-assistance
https://www.schatz.senate.gov/coronavirus/small-businesses/sba-paycheck-protection-loan-program
