The SBA's Economic Injury Disaster Loan or The Paycheck Protection Program: Which is right for your business?
The new CARES Act has got small business owners sitting on the edge of their seats.
As the anticipation builds, the coronavirus continues to pummel the country’s small businesses, and the U.S. Department of the Treasury continues to work with the SBA to distribute this desperately-needed financial relief.
In their combined efforts to help businesses weather this crisis, the Treasury and the SBA have announced two initiatives under the CARES Act:
1) The new Paycheck Protection Program (PPP)
2) The expansion of the already-existing Economic Injury Disaster Loan (EIDL) program
What are the differences between EIDL and PPP? What are the similarities? Can businesses get both an EIDL and a PPP loan?
Discover everything you need to know about these two programs below!
Economic Injury Disaster Loan (EIDL)
Far before the coronavirus outbreak existed, the Small Business Administration created a specific program designed to help small businesses that face economic damage as a result of a declared emergency: the Economic Injury Disaster Loan Program (EIDL).
As noted, EIDLs are only available to businesses that have sustained economic injury resulting from a situation that the government has officially declared to be an emergency. While this program was not made in reaction to the COVID-19 pandemic, it is worth mentioning that this is the first time that a virus has ever been added to the list of declared national emergencies.
Given the unique challenges that small businesses are facing with respect to the coronavirus, the EIDL Program has made changes to certain requirements in order to make these loans more accessible to businesses hurt by this disaster. For the sake of clarity, wherever we refer to the EIDL Program throughout this article, we’re referring to the “Coronavirus version” of the program.
The Paycheck Protection Program
The Paycheck Protection Program (PPP) is a unique program designed with the specific intent of helping small businesses combat the economic consequences of the coronavirus outbreak.
As the name suggests, the PPP is largely (but not exclusively) focused on providing small business owners with the funds they need to continue providing paychecks to their employees. The end goal is to keep the unemployment and business failure rates low. According to the SBA, “The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.”
Who is eligible?
Since these programs exist solely for businesses in need of emergency financial aid (and not simply those that want the extra cash), there are certain criteria that small businesses must meet in order to qualify. Those qualifying criteria differ a bit between the two programs.
EIDL Eligibility Criteria
To qualify for the Economic Injury Disaster Loan Program you must:
- Be a small business, independent contractor, sole proprietor, ESOP, tribal business, or nonprofit organization
- Have fewer than 500 employees
- Be located in the USA
PPP Eligibility Criteria
To qualify for the Paycheck Protection Program you must:
- Be a small business, independent contractor, sole proprietor, self-employed individual, ESOP, tribal business, veteran organization, or nonprofit organization
- Have fewer than 500 employees
- Have proof your business has been negatively impacted by the coronavirus outbreak
What is the maximum loan amount?
The maximum loan amount for these two CARES Act small business aid programs differ in quite significant ways. That may be due to the specific expenses that the PPP is designed to cover, whereas the EIDL can be used for a wider array of business costs (more on that further down).
EIDL max loan amount
- The maximum loan amount for the EIDL program is $2 million
- The exact amount that your business may be able to obtain is determined by the SBA
PPP max loan amount
- The maximum loan amount for the PPP is $10 million
- There’s a cap of approximately $20,833 per employee per month
- The exact amount that your business may be able to obtain through a PPP loan is (last year’s average monthly payroll costs) x 2.5
How much do I qualify for?
Click here to use our free calculator
What is the repayment period?
Of all the differences between the Economic Injury Disaster Loan Program and the Paycheck Protection Program, the repayment periods may have the biggest gap between them. This is like because the PPP is designed to give small businesses the ability to cover payroll expenses over the near-term, whereas the EIDL Program has a broader scope.
EIDL repayment period
- The repayment period for Economic Injury Disaster Loans is up to 30 years
- The COVID-19 EIDL has an automatic deferral period of 4 months
PPP repayment period
- The repayment period for PPP loans is up to 2 years
- The PPP loan has an automatic deferral period of 6 months
What can the funds be used for?
The Paycheck Protection Program was launched with the mission of “providing a direct incentive for small businesses to keep their workers on the payroll.” While there are still other ways that PPP loans can be used, the EIDL is far more flexible in terms of what the funds can be spent on.
PPPs - Use funds for:
The funds provided by PPP loans can be used to cover payroll and/or mortgage interest, rent, or utility costs incurred before February 15, 2020
Note: The U.S. government has specifically mentioned that it may pursue criminal charges against you if they find that the funds were used for fraudulent purposes
EIDLs - Use funds for:
The funds provided by EIDLs can be used for any business operating expenses that can’t be met as a direct result of the coronavirus outbreak
That includes working capital, inventory, equipment purchases, real estate payments, and more
How to access the funds
Although both the Economic Injury Disaster Loan Program and the Paycheck Protection Program are both headed by the SBA, you’ll have to apply through different entities depending on which program you’re interested in pursuing.
Access EIDL funds
Accessing EIDL funds is done by applying directly through the Small Business Administration.
Access PPP funds
- Accessing PPP loan funds is done by applying through any existing SBA lender
- That includes alternative lenders, banks, and federally insured depository institutions, credit unions, and Farm Credit System institutions. Find out how to apply for PPP loans through Become
Economic Injury Disaster Loan vs Paycheck Protection Program
Which is right for your business?
Before we go any further, it’s important to note that your business doesn’t necessarily have to choose to apply for one program or the other. Assuming that the funds from the two programs are used to cover different expenses, you won’t be faced with any problems if you get approved for both. That said, you may prefer to choose just one if it’ll be enough to cover your business’s financial needs.
Paycheck Protection Program loans are mainly intended to help small businesses cover their payroll expenses. That being the case, part of the application process will include signing a ‘certificate of good will’ stating that you will use the funds for the intended purposes. Additionally, if you’re planning on applying for PPP loan forgiveness, you’ll actually need to prove that you used the funds for those intended purposes.
Clearly, PPP loans have pretty strict rules about what they can be used for. However, if you follow those rules, you may be able to have 100% of the loan amount forgiven. That’s a huge perk!
The Economic Injury Disaster Loan Program, on the other hand, allows borrowers to use the funds for a much wider variety of business expenses. That means more flexibility for business owners to decide how to best use the funds in their efforts to keep their business afloat. Plus, one of the biggest attractions of the revised EIDL Program is the ability to receive an emergency grant of up to $10,000 within just a few days of applying.
Flexibility and quick-access aside, EIDLs have one clear disadvantage when compared to PPP loans: they’re not forgivable.
Ultimately, the decision of whether to apply for an EIDL or a PPP loan will depend on factors that will differ from one business to the next. We always recommend speaking with your financial advisor to make the best decision for your business’s needs.
Stay up-to-date
We don’t mean to be alarmist, but the fact is that there’s quite a bit of uncertainty revolving around the coronavirus outbreak and how the government intends on helping small businesses overcome the effects of it.
Keep your business informed and prepared:
Bookmark our COVID-19 Business Funding News & Updates hub
Join our COVID-19 Business Community Center - see you there!
This post first appeared on the Become blog at https://become.co/blog/coronavirus-economic-injury-disaster-loans-vs-paycheck-protection-program/