PPP Loans vs. EIDL: Which is Right for You?

PPP Loans vs. EIDL: Which is Right for You?

Most small business owners affected by the coronavirus pandemic can apply for federal loan relief. The Paycheck Protection Program (PPP) loan and Economic Injury Disaster Loan (EIDL) both have low interest rates and parts that may not need to be repaid. If you need assistance with the application, please text us at 347-789-7748 or schedule an online appointment.

Still, there are significant differences, too, beginning with the way you apply. You can apply for one or both, but it’s important to consider your business’s financial needs, staffing and long-term outlook when deciding between a PPP loan. EIDL. And with business owners reporting problems and calling for additional federal funds, these programs aren’t your only choice — you could also consider other emergency loans, as well as local and regional assistance. 

PPP loans vs. EIDL: How they stack up

Let’s take a brief look at each program.

PPP is new, a product of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. It offers forgivable loans up to $10 million to cover payroll costs during the COVID-19 outbreak. 

EIDLs previously existed but have been expanded because of the pandemic. They provide low-interest funding up to $2 million to cover a broader range of business expenses than what PPP loans cover. While waiting for the EIDL, eligible recipients could get a cash advance up to $1,000 per employee, totaling up to $10,000, need not be repaid and may be used for almost any business purpose. 

Here is a breakdown of the details: 

	Paycheck Protection Program Loans	Economic Injury Disaster Loans
Loan purpose	Mortgage or rent payments, utilities and payroll costs, including: Employee salaries Paid sick or medical leave Insurance premiums	General business expenses, such as payroll, fixed debts and accounts payable
Amount	Up to $10 million	Up to $2 million
Maximum interest rate	1% fixed interest	3.75% fixed interest for small businesses 2.75% fixed interest for nonprofits
Maximum repayment terms	2 years	30 years
Loan forgiveness available	Yes – For eight weeks’ worth of approved payroll and rent or mortgage expenses only, with 75% going toward payroll costs.	No. Eligible applicants may receive a cash advance up to $10,000 that does not need to be repaid.
Collateral	Not required	Not required for loans up to $25,000. Loans exceeding $25,000 would require a general security interest in business assets as collateral.
Personal guarantee	Not required	Not required for loans up to $200,000.
Where to apply	SBA-approved banks and credit unions are accepting applications.	U.S. Small Business Administration
Application deadline	June 30, 2020	Dec. 21, 2020

Eligibility requirements for both loans are similar: Your business or nonprofit must meet the SBA’s size standards, which typically require a business to employ 500 people or fewer, though there are exceptions for certain industries. You also needed to have been in operation on Jan. 31, 2020 for an EIDL and Feb. 15, 2020 to be eligible for a PPP loan. 

Which one is right for my small business?

PPP loans

Best for: Small business owners struggling to keep employees on the payroll. Main funding needs should include payroll expenses, as well as expenses related to the physical business location, such as rent and utilities. 

Loan overview

Paycheck Protection Program loans are designed to encourage small business owners to retain employees during the COVID-19 crisis. Loans are available up to $10 million with a 100% SBA guarantee. The SBA offers loan forgiveness for funds spent on specific expenses during the eight weeks following loan start, including: 

• Mortgage or rent payments 
• Utilities 
• Payroll costs 
• Employee salaries 
• Paid sick or medical leave 
• Insurance premiums 

Borrowers can use loan funds for other expenses, but any money spent on anything outside SBA-approved expenses is not forgiven. Additionally, approved payroll expenses do not include employee compensation exceeding $100,000. Any reduction in employees during the eight-week period would result in a proportionate reduction in your forgiveness amount. If you laid off employees before receiving your loan, re-hiring those workers before June 30 could make you eligible for full loan forgiveness. 

Any amount that is not forgiven would retain its full guarantee but would have a two-year repayment term with 1% interest. All PPP borrowers would receive the same terms. 

Maximum loan amount calculation: Your maximum loan amount would depend on your average monthly payroll costs in the last year. You would multiply your average monthly payroll expenses by 2.5 to determine the highest amount you could borrow. If your business was not open in 2019, you could use your payroll costs from January and February of this year. 

Have more questions about the PPP? Check out these FAQs. 

EIDLs 

Best for: Small businesses unable to pay a variety of daily expenses, including payroll, accounts payable and other fixed debts. 

Loan overview

The SBA expanded its existing Economic Injury Disaster Loans program to incorporate businesses affected by the COVID-19 outbreak. EIDLs are intended to supplement the temporary loss of revenue small businesses are experiencing because of the pandemic. Business owners would show losses as of Jan. 31, 2020 in comparison with 2019 financials. These disaster loans are available up to $2 million, with a 3.75% interest rate for small businesses and a 2.75% rate for nonprofits. As of mid-April, however, some small business owners reported that their loans were being capped at amounts as low as $15,000. 

Funds are not eligible for loan forgiveness, but repayment terms could be as long as 30 years, depending on the individual borrower’s ability to repay debt. 

Unlike PPP loans, EIDLs are direct loans, funded through the U.S. Treasury Department. Rather than applying through a partner lending institution, as you would to obtain a PPP loan, you would apply directly through the SBA to get a disaster loan. 

Disaster loan advance: While waiting to receive your EIDL, you could qualify for an advance on your loan up to $10,000; this part of your loan would not need to be repaid. You must request the advance in your EIDL application to be considered. The SBA should issue an EIDL advance within three days of receiving a successful disaster loan application. 

Have additional questions about EIDL? Check out these FAQs. 

PPP loans vs. EIDL: What to consider

Whether a PPP loan or an EIDL would be the best solution varies from business to business, according to Katie Vlietstra, vice president for government relations and public affairs for the National Association for the Self Employed. Rather than applying for financing in a fit of panic, take time to analyze your true cash needs and if you have access to any other forms of credit. Vlietstra recommended working with a trusted adviser, such as an attorney or an accountant, to determine your business’s financial standing and navigate the loan application process. 

“The reality of the situation is this is not a short-term crisis,” Vlietstra said. “It would behoove any business owner right now to assess what their needs will be in the long term.” 

Determine how much cash your business needs now.

The $10,000 EIDL advance could make disaster loans a more attractive choice than PPP loans, especially to self-employed business owners or those who run smaller businesses, Vlietstra said. Even if you are not approved for the loan, you could receive the advance, which you would not need to repay. 

Businesses that need a quick infusion of capital and may be able to get by on a smaller amount could be drawn to the advance that’s part of the EIDL program. Additionally, the simplicity of the disaster loan application process — which you can complete online directly through the SBA — may seem more feasible than meeting banks’ changing requirements for PPP loans. 

Consider your long-term operations.

EIDLs would need to be repaid, with interest, while PPP loans would be eligible for full loan forgiveness, including any interest accrued. EIDLs may not be as appealing for business owners who are unsure of their financial future. 

As discussed earlier, PPP loans may be fully forgiven if funds are spent on SBA-approved expenses and all staff members remain employed. The SBA is also offering six months of deferred loan payments on PPP loans. 

If you cannot decide, apply for both.

Although you cannot receive a PPP loan and a disaster loan to help with the same expenses (such as payroll), you can apply for both loans. You may receive the $10,000 advance in the meantime, which you would not need to repay regardless of whether you are approved for a disaster loan. And if you are denied an EIDL, you may be able to receive a PPP loan. However, any advance amount you receive up to $10,000 would be deducted from the PPP loan amount eligible for forgiveness. 

“You can apply for both, and then depending how it nets out from a cash flow perspective or expediency, you can pull your application if you pursue one over the other,” Vlietstra said. 

Confusion over eligibility 

Despite being told that they could apply to any existing SBA 7(a) lender or other participating institution, small business owners met unexpected obstacles. Bank of America, for example, originally prioritized customers who had previously borrowed from the bank but has since begun allowing small business owners who do not meet that requirement to work directly with a banker to apply for a PPP loan. 

Consider a community bank instead 

Large banks have grabbed headlines, but community banks have processed most of the PPP loans so far. And more may come online: the SBA has made a new form available for non-SBA lenders to receive authority to issue PPP loans under the program, as long as they are federally insured institutions. 

Community-based banks were already among the most active SBA lenders, alongside giants like Wells Fargo and Bank of America. The Independent Community Bankers of America have asked the U.S. Treasury Department to distribute 25% of existing PPP funds to community banks with no more than $50 billion in assets. 

Online lenders 

Non-bank, online business lenders, such as Kabbage and PayPal, have also been approved to process PPP loans. 

More funds for the PPP. In case borrowers drain the PPP loan fund sooner than expected, Treasury Secretary Steven Mnuchin plans to secure an additional $250 billion to support the small business loan program. If you need assistance with the application, please text us at 347-789-7748 or schedule an online appointment.

Related Article: U.S. COVID-19 Relief: SBA Disaster Loans