The Federal CARES Act has made hundreds of billions of dollars available to businesses for coping with disruptions due to Covid 19. With filing changes coming out, deadlines being extended, and rules around these programs in flux, we wanted to provide some guidance to our clients regarding the CARES Act, Paycheck Protection, and EIDL loan programs.
The two biggest stimulus programs for small businesses are the SBA’s Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP). What are the differences between them? Is one better than the other?
As of June 15, SBA began accepting new Economic Injury Disaster Loan (EIDL) and EIDL Advance applications from qualified small businesses and U.S. agricultural businesses.
Small business owners and qualified agricultural businesses in all U.S. states and territories are currently eligible to apply for a low-interest loan due to Coronavirus (COVID-19).
Agricultural businesses are now eligible as a result of the latest round of funds appropriated by Congress in response to the COVID-19 pandemic.
- Agricultural businesses includes those businesses engaged in the production of food and fiber, ranching, and raising of livestock, aquaculture, and all other farming and agricultural related industries (as defined by section 18(b) of the Small Business Act (15 U.S.C. 647(b)).
- SBA is encouraging all eligible agricultural businesses with 500 or fewer employees wishing to apply to begin preparing their business financial information needed for their application.
President Donald Trump signed a bill on Saturday 7/3/20 re-opening the application window for the Paycheck Protection Program (PPP) until Aug. 8.
The five-week extension had been approved last week by both chambers of Congress. The U.S. House of Representatives and the Senate both passed the legislation by unanimous consent.
What are the differences between the EIDL and the PPP?
|Maximum loan amount||$150k||$10 million|
|Forgivable?||No, but up to $10k advance grant included||Yes|
|Collateral required?||Possibly, depending on loan amount||No|
|Credit check required?||Yes||No|
|Automatic payment deferral||12 months||Until forgiveness application is processed, 10 months after end of covered period otherwise|
|Where do I apply?||SBA website||Directly from an approved lender|
|Loan terms||3.75%, up to 30 years (2.75% for non-profits)||1%, 2 years; 5 years for new loans|
|Approved uses of loan funds||Fixed debts (rent, utilities, etc.)|
Some bills that could have been paid had the disaster not occurred
Should I apply for both?
Yes, you should! Applying for both loans ensures that you take full advantage of these programs to support your business. There are a few conditions to keep in mind when using both loans:
You cannot use funds from both loans for the same purposes.
For example, you can’t use both EIDL and PPP towards payroll. For example, if you used PPP funds for May payroll, you’ll have to use EIDL funds for a different payroll period or for other approved working capital uses. If an EIDL loan financed between January 31 and April 3 is used for payroll costs, it will be refinanced into your PPP loan if you apply for one.
Your EIDL advance grant cannot be combined with the PPP.
The EIDL can come with an advanced grant of up to $10,000. As a grant, it won’t have to be paid back. However, it will be subtracted from the PPP loan forgiveness amount and has to be declared when you apply for the PPP and when you apply for PPP forgiveness.
How to apply
You can apply for the EIDL directly through the SBA (apply here).
For the PPP, you’ll need to apply through an SBA-approved lender. We recommend applying through a financial institution you already have a banking relationship with—that’s the fastest way to get approved.
How do I take advantage of both loans?
Since the PPP and EIDL cannot be used towards the same expenses, the best practice is to use the PPP for any payroll expenses and the EIDL for all other working capital. This will ensure that you can get the PPP forgiven while still covering your business expenses.
When would the EIDL not be a good choice?
Generally, the EIDL is a great loan that you should take advantage of, if you can. However, the EIDL isn’t for everybody.
First, you simply won’t be eligible for the EIDL if you are delinquent on existing SBA loans, loans from another federal agency, or payment of any part of a direct federal debt except IRS obligations. In order to be eligible, the SBA expects applicants to be on good terms with federal loan issuing agencies and the SBA.
The second reason why the EIDL may not be the best choice for your business is dependent on what you as a business owner would like to use the EIDL funds for. Despite the freedom of fund usage as compared to the PPP, there are still a number of ineligible uses of the EIDL loan. If your intentions were to use the EIDL loan towards these ineligible expenses, the EIDL would not be the best option for you.
These expenses include:
- Dividends and bonuses
- Disbursements to owners, except when directly related to performance of services
- Repayment of stockholder/ principal loans
- Expansion of facilities or acquisition of fixed assets
- Repair or replacement of physical damages
- Refinancing long term debt
When would the PPP not be a good choice?
The biggest disqualifier for the PPP is if you do not run a payroll and pay yourself through owner draws or member distributions.
Your PPP loan is calculated based on wages that employment and self-employment taxes have been paid on. This generally comes in the form of:
|Entity type||Taxed wage type||Where to find it|
|Sole props / single -member LLCs||Net profit||Form 1040 Schedule C|
|Partnership LLCs||Net profit||Form 1065 and associated K-1s|
|Corporations||Payroll expenses||Payroll reports|
Draws and distributions are not subject to these taxes and cannot be used in the PPP loan amount calculation. If you are a sole prop or partnership and did not report a net profit in 2019 (i.e. you had a net loss), you also would not be eligible for the PPP.
Similar to draws and distributions, 1099 contractors are not included in the PPP calculation, even if they are regularly paid for employee-like tasks. This is because contractors are considered sole proprietors and can apply for the PPP themselves. If you’re a business that primarily uses 1099s, your actual payroll expense considered for the PPP may not be very high.
It’s important to note that the PPP is primarily meant to help employers pay their employees throughout the 24-week period after receiving the loan. That is why at least 60% of the loan must be used towards payroll expenses in order to be considered for full loan forgiveness. What this means for you is that if you have large expenses outside of payroll, your PPP funds will be limited in the amount you can use towards them in order to still qualify for loan forgiveness.
Finally, you cannot double-dip with unemployment benefits while using PPP funds. We recommend using the PPP for the 24 weeks and then applying for unemployment once that period is over.
The EIDL will require you to provide information on your business’ gross revenue and cost of goods sold over the last 12 months. If you don’t have this information handy, you’ll likely need retroactive bookkeeping done so you can calculate this number properly.
For the PPP, you don’t need to have bookkeeping done to apply, so long as your business runs payroll through a payroll service and you can submit your payroll records. If you’re self-employed, you’ll need to submit your net profit, which you will need bookkeeping to calculate properly. Once you’ve been approved for the PPP, bookkeeping becomes even more important: you’ll need to track your expenses in order to prove you spent the funds on the right things—this will be a key component of getting your PPP loan forgiven.
Crescent has the experience and resources to assist you as you navigate the application process for these programs.
If you do qualify for the EIDL or the PPP, there will be a separate process required for the application of the “grant” or “forgiveness” portions of the respective programs.
Please let us know if you have any further questions. We are offering services to assist in the applications for these resources.