The United States economy is still under siege due to the coronavirus pandemic. Southern states like Florida and Texas are now being rocked by the virus. Florida is now reporting over 10,000 positive cases per day. To limit the spread of the virus, these states have no choice but to close businesses once again. For this reason, the U.S. government has extended the SBA Paycheck Protection Program (PPP) until August 8th.
In addition to the PPP, many businesses took advantage of the Economic Injury Disaster Loan (EIDL) program. Read on for a comprehensive guide to the two loan programs. Explore the benefits of each policy initiative and the striking differences between the two.
What is the CARES Act?
The government recognized the enormous financial burden imposed by the coronavirus pandemic. Months after it reached American shores, millions of citizens are still staying home to promote public health. Millions of businesses deemed non-essential were ordered to cease operations to help prevent viral spread.
In March, the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Included in the CARES Act were generous financial benefits for American businesses. Two of these programs are the EIDL and PPP.
What is the EIDL Program?
The EIDL was an existing loan program administered by the SBA. The CARES Act provided an additional $60 billion in funding for this program. Of this total funding allocation, $50 billion was slated for loans and the other $10 billion for emergency grants.
In addition, the CARES Act made more businesses eligible to apply for the EIDL program. This expansion included farms and other agricultural businesses with less than 500 employees.
What is the PPP?
In tough times, businesses look to cut expenses to stay afloat. Payroll is the first place that management evaluates when reducing operating expenses.
The federal government wanted to avoid this from happening. For starters, the situation was extraordinary because federal and state governments were asking businesses to stay closed. Government executive orders were the reason why employees could not work.
In addition, the state unemployment system would be overwhelmed if millions were forced to apply for benefits. Also, unemployment only provides for a portion of an employee’s salary.
Based on these facts, the government created the PPP. The premise of the program is to provide small businesses with forgivable loans. American businesses can get all or most of the loan forgiven by keeping their employees on the payroll.
What are the Differences Between the SBA Paycheck Protection Program (PPP) and the EIDL Program?
There are many major differences between these two SBA programs. They are different in scope, size, and what the funds can be used on. Continue reading to see how the loans differ:
The PPP is a much larger program than the EIDL as it pertains to the coronavirus pandemic. Congress allocated $60 billion to the EIDL program. On the other hand, the SBA had issued more than $500 billion for the PPP by the end of June. Due to popular demand, the program was extended to August 8th with roughly $130 billion still available.
The PPP offers an incentive to business owners to keep their employees on the payroll. The loan is potentially fully forgivable so long as the business meets the program’s rules.
Funds issued under the EIDL program are not forgivable. You may receive a $10K advance grant; however, the remainder of the loan amount must be paid back.
Max Loan Amount
Along these same lines, the PPP offers bigger loan amounts. Under the EIDL program, the max loan amount is $2,000,000. This includes the $10K advance grant.
The PPP, however, offers up to $10 million. Considering that the PPP is to maintain payroll, a business with a moderate number of employees would burn through the EIDL funds quickly. A larger amount is necessary to keep people employed.
Due to the urgency of the PPP, the program requirements are relaxed. For example, a credit check is not required on the application.
In addition, collateral is not required for the loan. For the EIDL program, a credit check is necessary and collateral is potentially necessary.
Interest Rates and Terms
The PPP and EIDL have vastly different loan terms. For instance, the interest rate for EIDL is 3.75% while PPP is 1%.
While the interest rate for PPP looks more favorable than EIDL, the term is up to 5 years for new loans. The EIDL offers loan terms up to 30 years.
Approved Uses of the Loan
Each program allows you to use funds for different expenses. As we discussed earlier, the PPP is designed for payroll expenses. You can use 40% of the funds for expenses like mortgage/rent interest or utilities.
For the EIDL, you can use loan funds for fixed debts and accounts payable. Bottom line is that the EIDL allows you to more broadly use the funds. If you do not use PPP funds appropriately, you will be ineligible for loan forgiveness.
Where to Apply
One of the major differences between the two programs is where you apply. For the EIDL program, you apply on the SBA website.
For the PPP, however, you need to find an SBA-approved lender. Then you will file an application with the lender directly. To make matters easier, you can submit an online application for our lending services here.
How to Apply for the SBA Paycheck Protection Program (PPP)?
The PPP application process is two-fold. You have to complete a short two-page application to get approved for the funds.
It is a relatively painless process as there is no credit check and collateral is not required. The second part of the application process involves loan forgiveness.
For this part of the application, you will be required to provide actual costs incurred. Read on for specific details on the application process:
In the first section of the PPP application, the SBA asks for general information about your business. They want to know the physical location of your business and how to contact you. Also, ownership information for anyone with a 20% or more stake in the company is requested.
The SBA wants to know your business classification, whether it is an S-Corp, independent contractor, or other. They will also ask for your tax identification number.
Remember, the intent of the PPP is to keep your employees on the payroll. Therefore, the SBA wants to know specifics about your payroll expenses.
Along these lines, the application asks for your weekly average payroll. It will then ask for the number of employees you have.
The application multiplies your weekly payroll by 2.5x and adds any EIDL advance. This amount equals your PPP loan request.
Lastly, the application asks for the purpose of the loan. The SBA wants to verify that you plan to use the funds for payroll, utilities, or mortgage/rent interest.
Questions and Certifications
Next, the SBA will ask a series of yes or no questions. They want to verify that the borrower is not in trouble with the law. Also, they want to verify that the funds are going to employees who reside in the United States.
Under the certifications section, the SBA will verify that you understand what the program entails. One important takeaway is an acknowledgment of the 60:40 payroll to non-payroll ratio.
This directly affects your ability to get the loan forgiven in the future. The SBA expects you to spend at least 60% of the funds allocated to retain head-counts and salary at existing levels.
You are allowed to spend money on non-payroll items like utilities and interest. However, spending more than 40% on non-payroll will lead to a reduced forgiveness amount.
How to Apply for Loan Forgiveness?
The loan forgiveness application asks for a lot more financial data. For the covered period, the SBA asks how much the company expended on payroll, utilities, and interest.
The application relies on some inputs from an appendix called Schedule A. Here, the SBA wants to verify that the company maintained payroll at its prior levels.
The way they achieve this is by ensuring that Full-Time Equivalents (FTEs) remained steady during the covered period. In addition, they want to make sure that employees’ salaries were not reduced to decrease operating expenses. If you did reduce salary or FTEs, Schedule A will help you calculate whether an adjustment is required to the loan forgiveness amount.
The loan forgiveness application settles on the lowest of three potential amounts. The first is the modified amount discussed above.
The second potential amount is what was requested on the original application. Lastly, the final possibility is the 60% threshold for payroll.
The SBA Paycheck Protection Program (PPP) vs. the EIDL Program
These are two incredible programs designed to bail out small businesses in America. They offer lower interest rates and better terms than anything you will find in private industry.
As it pertains to the PPP, you can even get the full loan amount forgiven. There is still $130 billion in PPP funds available through August 8th, so the time to act is now.
If you want to learn more about the SBA Paycheck Protection Program, contact us today to speak with an expert.