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An Evaluation of the Economic Injury Disaster Loan and the Paycheck Protection Program

The U.S. Small Business Administration (SBA) has made several programs available to help small businesses.  The Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP) loan are two very aggressive pieces of legislation that were passed in order to combat the significant impact that COVID-19 has had on the economy of the United States and, more importantly, main street businesses. Although many articles have been written explaining the details of the loans, very few articles have been written explaining how and why business owners should go about choosing the various loan options.

While both loan options provide a way to infuse capital into your business, there are several things to consider when choosing between one loan over the other or both. First, it’s important to note that even though business owners can apply for both loans, the loans cannot be used for duplicative purposes. Business owners who have previously applied for the EIDL can subsequently refinance their loan into the PPP to qualify to have the loan amount forgiven (pending successful approval). Now that both loans are available, business owners should carefully consider what their needs are. For example, a service business whose primary asset is its employees would be best suited to apply exclusively for the PPP while a manufacturing company that may require funds to not only pay employees but cover working capital costs as well may benefit from the EIDL.  Business owners should work closely with their CPA or financial advisor to determine which loan option is best suited for their immediate needs.

As previously mentioned, under the PPP, any amounts used for a specific purpose during the 8 weeks following the disbursement of the loan can be forgiven. The process of forgiving the loan is going to be based on specific, measurable criteria which will include the amount of your payroll costs during the 8 week period, the number of employees you retained, and the amount of the funds used for payroll versus other approved expenses. This will require taxpayers to maintain a detailed record of how the funds were utilized. One suggestion is to deposit the funds into a bank account setup exclusively for the purpose of keeping these funds separate from other cash accounts. While this may be extreme, it would be prudent of any business owner to take extra measures to ensure a smooth application process when it comes time to apply to have the loan forgiven.

Another item for business owners to consider is the use of the loan. Businesses with a limited number of employees will be better suited to apply for the EIDL loan which offers more beneficial repayment terms which include a 3.75% interest rate up to 30 years and longer list of acceptable uses. Alternatively, if owners were to apply for the PPP loan and subsequently use it for non approved expenses which would require that they have to pay it back, they would be stuck with a loan which would have a 1% interest rate and would be due in 2 years! For example, a $300,000 loan that needs to be repaid would require the business to remit over $12,500 a month for two years. Furthermore, with such a low interest rate, the amount of the deductible interest would be minimal!

Regardless of the loan options owners choose, you should always consult your CPA or Lender to understand the implications for your business.

Need Expert Tax Guidance?

For businesses or individuals who think they may qualify or can take advantage of any of the above incentives provided by the Stimulus act, SmartBooks suggests a consultative phone call with one of our professionals to ensure compliance is met for each incentive taken. You can book a meeting with our Tax Manager here.

Comparison Chart

Economic Injury Disaster LoanPaycheck Protection Program
Agency
  • SBA
  • SBA Approved Financial Institution
Amount of the Loan
  • Up to $2 million (determined by SBA based on loan application)
  • $10k automatic grant to be paid within 3 days of successfully submitting the application. 
  • Lesser of $10 million or 2.5 times average monthly payroll costs incurred during the 12-month period prior to the loan date. (Note: Calculations for seasonal businesses or businesses who do not have a full year of activity vary)
  • EIDL loans can be rolled into PPP 
Interest Rate
  • For-Profit – 3.75% / NFP – 2.75%
  • 1%
Term / Maturity
  • Up to 30 years
  • 2 years after deferral period
Deferral
  • 12 months (interest accrues during deferment)
  • 6 month (Interest accrues during deferment)
Prepayment
  • Yes – without penalty
  • Yes – without penalty
Eligibility
  • Small Businesses in all U.S. States and territories, including sole proprietors or independent contractors
  • Private nonprofit organizations
  • Small agricultural cooperatives
  • Tribal small businesses concerns
  • ESOPs
  • Fewer than 500 employees*
  • Small businesses in all U.S. States and territories, including sole proprietors, independent contractors and self-employed individuals. 
  • 501(c)(3) nonprofit organizations
  • 501(c)(19) veterans organizations
  • Tribal small business concerns
  • Fewer than 500 employees in most instances, more in certain industries
Usage
  • Fixed Debts
  • Payroll and Related Benefits (with some exclusions)
  • Accounts Payable and other expenses that cannot be paid because of the disaster’s impact
  • Payroll and related benefits (with some exclusions)
  • Interest on mortgage obligations incurred before February 15, 2020
  • Rent, under lease agreements in force before February 15, 2020
  • Utilities, for which service began before February 15, 2020
Cannot be used for
  • Refinance Existing Long Term Debt 
  • Payment of other SBA loans or lenders
  • Tax Penalties
  • Civil Fines
  • Repairs of property or other physical damage
  • Pay dividends or distributions to owners/partners
  • Limited to uses listed above
Guarantees
  • Waives requirement of personal guarantees on loans less than $200k 
  • None
How to Apply
  • Application process can be completed online at www.SBA.gov
  • Applications can be submitted through existing SBA lenders or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. 
Loan Forgiveness
  • No
  • Businesses must apply through their lender for forgiveness of the loan. This will include:
    • Documentation to verify the number of employees on payroll and pay rates. Including IRS payroll tax filings and state income, payroll, and unemployment insurance filings
    • Documentation to verify payment on covered mortgage obligations and utilities
    • Certification from an officer of the business or organization that is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use. 
Collateral Required
  • The SBA will place a UCC lien against the assets of the business
  • None

Download a PDF of this chart

Need Expert Tax Guidance?

For businesses or individuals who think they may qualify or can take advantage of any of the above incentives provided by the Stimulus act, SmartBooks suggests a consultative phone call with one of our professionals to ensure compliance is met for each incentive taken. You can book a meeting with our Tax Manager here.