PPP vs. EIDL Loan Programs Explained
The COVID-19 pandemic has left the American economy in shambles. In order to help small businesses from completely going under, lawmakers passed the Coronavirus Aid, Relief, and Economic Security Act (also referred to as the CARES Act) in March. This bill, through the Small Business Association (SBA), offers two different loan packages meant to offer financial relief and assistance to businesses: the already existing Economic Injury Disaster Loans Program (also known as EIDL) and the newly enacted Paycheck Protection Program (referred to as PPP).
Unless you happen to be fluent in legalese, it might be confusing to figure out which program you should be applying for. Luckily for you, we have a comprehensive list of the differences between the two that should help you on your journey to financial relief!
What is the Paycheck Protection Program (PPP)?
The PPP is a loan program that originally delegated nearly $350 billion to provide assistance to small businesses in the United States -- the main purpose being to cover payroll. Lawmakers expanded the program in April by adding an additional $310 billion as well as allowing more time to spend funds and making it easier to get a loan forgiven.
All small businesses are eligible, so this includes sole proprietorships, independent contractors, and self-employed individuals. The loan can cover expenses for up to 24 weeks (roughly 6 months), and has an interest rate of 1%. The main catch is that a minimum of 60% of the money must be used to pay employees and fund employee benefits costs. The only payroll costs that are not covered are any payments to independent contractors and any S or C corps owners who are not on the regular payroll. All payroll expenses, specifically salaries, are capped at $100,000, however, so if you or any of your employees make more than that, a pay cut is required.
One of the best things about the PPP is that these loans can essentially be forgiven, as long as you follow all of the guidelines given -- such as not laying anyone off or reducing wages more than 25%.
(Make sure to keep your records up-to-date to prove all of your expenses during the 24-week loan period!)
The loan will be calculated using the average monthly cost of the salaries of you and your employees (as long as they are on a W2), according to the SBA. For sole proprietors or the self-employed, the loan will be based off of your net profit. (Essentially, add up all of your payroll expenses for the year and divide by 12.)
You apply for the PPP loan not through the SBA, but through a separate, eligible lender. The SBA has a Lender Match tool where you can find the best lender for you. This PPP application form shows all the information you’ll need to provide in order to qualify.
How does this differ from the Economic Injury Disaster Loan (EIDL)?
To qualify for an EIDL your small business needs to be located in an area that has been affected by disaster. So, since COVID-19 is wreaking havoc everywhere, all small businesses in the US, in theory, qualify.
And because of the pandemic, the SBA has loosened some of its loan conditions. If you qualify, you can be approved based on your credit score, so you don’t have to prove you couldn’t get credit elsewhere (which tends to be common with EIDL loans). Additionally, any loans under $25,000 require no collateral (in comparison, the PPP loan doesn’t require any business or personal collateral).
The main difference between the two is that the PPP allows you to borrow up to $10 million as long as you don’t lay people off, and the EIDL allows you to borrow up to $2 million in loans and gives you the opportunity to receive up to $10,000 in the form of a grant upfront.
The PPP is slightly more restrictive when it comes to the purpose of the funding. An EIDL can cover more operating expenses; however, the EIDL requires repayment, so there isn’t an option for loan forgiveness. You can apply for both loans, although you have to apply to the two for different reasons and the expenses would have to fund different things. You can apply for an EIDL here.
Times are tough for all small businesses right now, and the sometimes confusing lingo found on government websites doesn’t make navigating this any easier. Hopefully, we’ve been able to shed some light on the process, making it a little easier to deal with so you can continue focusing on growing and maintaining your business!