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The Economic Injury Disaster Loan vs. The Paycheck Protection Program

By Travis Miskowitz

On March 27th, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a stimulus bill that includes a loan program to keep small businesses afloat during mandated COVID-19-related closures.  The CARES Act includes a Paycheck Protection Program (PPP) which authorizes up to $349 billion of federally guaranteed loans to qualifying small businesses. This new loan program is based on the architecture of the SBA’s existing 7(a) loan program and will make forgivable loans of up to $10 million available to qualifying small businesses.

Borrowers are eligible to apply for an EIDL and PPP loan. If approved for an EIDL loan, borrowers are eligible to re-finance the EIDL loan with the PPP loan.

The table below compares the terms of the EIDL and PPP loans:

EIDL

PPP

Who is the lender?

The SBAA Bank that does SBA 7(a) Loans, underwritten by the SBA

What is the maximum amount of the loan?

The maximum loan size is $2 million. Applicants who apply for this loan may request an advance of up to $10,000 from the SBA. The advance will be distributed within 3 days. Applicants are not required to repay this advance if they are subsequently denied a loan.The maximum loan size is $10 million. The calculation is as follows:

2.5x the average monthly “payroll” costs, measured over the 12 months preceding the loan origination date. Seasonal business may use the period February 15, 2019 – June 30, 2019 or March 1, 2019 – June 30, 2019 to calculate the average payroll
If you took out the EIDL loan between February 15, 2020 and June 30, 2020 and you want to refinance that loan into a PPP loan, you would add the outstanding loan amount to the “payroll” sum.
Payroll includes salaries, commissions, tips, certain employee benefits (including health insurance and retirement benefits), state and local taxes and certain types of compensation to sole proprietors or independent contractors. Payroll costs specifically exclude compensation of an individual employee in excess of an annual salary of $100,000, foreign employees, FICA and income tax withholdings

What is the annual interest rate?

3.75% for businesses, 2.75% for non-profitsNot to exceed 4%

What Is the term of the loan?

Up to 30 years10 years

When is the first loan payment due?

One year after the loan origination date (interest is accrued during the deferment)At least six months after the loan origination date (interest is accrued during the deferment)

What can we use the loan for?

Financial obligations and operating expenses that could have been met had the disaster not occurredPayroll costs (as defined above), group healthcare benefits, insurance premiums, and interest (but not principal) on mortgages or other debt incurred prior to February 15, 2020, rent on any lease in force prior to February 15, 2020 and utility payments

What collateral is required?

The SBA will place a UCC lien against the assets of the businessNo collateral is required from eitherthe business or its owners

Is a personal guarantee required?

Yes, for loans > $200,000, owners of > 20% of the business, managing members of LLCs, managing partners of LPs. However, no liens will be taken against real estate owned by the guarantorNo

Is there a loan forgiveness program?

NoYes – calculated as the amount spent by the borrower during an 8-week period after the origination date of the loan on: payroll costs (as defined above), interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020. Payroll costs are subject to the same exclusions as noted above

What reduces the forgiveness?

N/AThe amount forgiven is 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, as selected by the borrower. The amount forgiven is also reduced to the extent that compensation for any individual making less than $100,000 per year is reduced by more than 25% measured against the most recent full quarter. Reductions in the number of employees or compensation occurring between February 15, 2020, and 30 days after enactment of the CARES Act will generally be ignored to the extent that reductions are reversed by June 30, 2020. Forgiven amounts will not constitute cancellation of indebtedness income for federal tax purposes.

Do I need to have filed my 2019 Taxes to apply?

No, 2019 Taxes do not have to be filed prior to applying for the loan. However, businesses will be asked to submit IRS form 4506T, which provides the SBA with access to historical tax returnsWill depend on the lender

How long will the loan application take?

2-3 weeks plus an additional 5 days for fundingUnknown at this stage

Can I apply now?

Yes, the application process is live, and loans are available now. There is no obligation to accept the loan if you qualify. The SBA typically allows 60 days to accept the loan offer, but you can always extend this if needed. Therefore, it is better to apply ASAPNo. Now that the CARE Act is law, the SBA will give their loan guidelines to the banks. The banks will then prepare their loan application process. We expect this to take at least two weeks

What businesses/entities can apply and what are the affiliation rules?

Small businesses. There are several standards the SBA uses to define a small business, and it varies by industry. As a general guide, less than 500 employees and $35 million in revenue would typically qualify. Applicants for SBA loan programs typically must include their affiliates when applying size tests to determine eligibility. This means that employees of other businesses under common control would count toward the maximum number of permitted employeesBusinesses and entities must have been in operation on February 15, 2020 and have 500 or fewer employees. There are some exceptions based on industry – see below
Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed individuals.
Any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a NAICS code beginning with 72 (Accommodation and Food Services companies)
Affiliation rules are also waived for franchises with codes assigned by the SBA, as reflected on the SBA franchise registry and businesses that receive financial assistance from one or more small business investment companies (SBIC)

Questions or concerns regarding PPP or EIDL? We're standing by and ready to help.

Economic Injury Disaster Loan, EIDL, loan, Paycheck Protection Program, PPP, Travis Miskowitz

Comments (16)

    • Yes, a self-employed business owner is able to apply for the PPP loan program. They will need to use their Schedule C to calculate their eligible loan amount. Banks began accepting applications for self-employed individuals on Friday April 10th.

    • Thank you for inquiring Myrna. Companies are eligible to receive both PPP and EIDL loans. You are required to use the proceeds for different purposes. At this point, the EIDL program is on its last legs. $17 billion has been allocated to the EIDL loan program while the SBA has received over $300 billion in requests under this program. Congress is stuck on providing an additional $250 billion to the PPP program, while there has been no discussion about increasing funding for the EIDL loan program. Please let us know if you have any other questions.

  • I’m a non-essential business and was ordered to close the 2nd week of March. I applied for the PPP and EIDL. If I’m approved for both, can I use the PPP for payroll and utilities for April and May and use the EIDL for payroll and utilities for the next 4 months. I’m sure my tattoo business won’t be allowed to open until we have a vaccine in place. And how will the PUI play into this as well.

    • You can apply for and receive both an EIDL and PPP loan, but you are required to use the loan proceeds for different expenses. The situation described below is not one we have encountered so far. I would tend to think that even though the timing of the expenses is different, since this is for the same purpose, you would not be able to use EIDL and PPP loan proceeds to pay for the same expenses.

  • Can we include business insurance premiums payments from PPP loan since it was not initially included in calculating the loan amount?
    Can we count office phone bills and cell phone bills provided to the employees for business purposes as part of utility payments?

    • Great question. To the extent employee reimbursements are included in gross wages, you should be using gross wages to determine payroll costs when applying for the PPP loan. You can include employer-paid health insurance payments when determining total payroll costs. Thank you for asking!

  • Can I apply for and get
    1. Pandemic Unemployment Assistance (California); My State Unemployment benefit is denied. also,
    2. PPP loan (forgivable); also,
    3. EIDL ($1000); Grant?
    all at the same time?
    Or must I choose among them?
    I am an interpreter of exotic languages and my income is completely stopped since February. I am paid by 1099.

    • Hi Dhiren – As unemployement eligibility varies significantly state by state, you will need to review the requirements in CA. Yes, You can get both a PPP loan and an EIDL loan, but you may not use both loans for the same purpose, the guidance states.

      There are a variety of eligibility requirements for the CA Pandemic Unemployment Assistance program as shown in this CA EDD site that also includes FAQ and contact information.
      Site link https://edd.ca.gov/about_edd/coronavirus-2019/

  • Do i pay social security tax employer portion out of the money received from paycheck protection program?

    • Hi Jeff – Employers that receive a loan under this program may not defer the deposit and payment of their share of Social Security tax due after they receive a decision from the lender that the loan was forgiven.

      However, employers who have received a Paycheck Protection Program loan, but whose loan has not yet been forgiven, may defer deposit and payment of their share of Social Security tax due March 27, 2020, and through the date the lender issues a decision to forgive the loan. Following this guidance, the employer will not incur penalties for failure to deposit and pay.

  • I have received PUI in CA and have been qualified for an EIDL loan, may I take the EIDL loan? I declined a PPP loan that was approved because I found out that you cannot have both PPP and PUI. However I am unclear about EIDL and PUI.

    • Hi Carol, unlike the PPP loan program, the EIDL loan program does not have any payroll-related conditions or restrictions. As a self-employed business owner, you will want to refer to you state unemployment agency to determine eligibility guidelines, which vary, state by state.

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