COVID-19 SBA Relief Loans – Differences between Economic Injury Disaster Loan and Paycheck Protection Program

by: Joshua F. Jones

Businesses and organizations face unique challenges in responding to the economic consequences of the COVID-19 (“coronavirus”) pandemic.  Leaders across all industries are looking for immediate economic relief to retain employees, pay the bills, and keep the doors open.

On Friday, March 27, 2020, the President signed into law the CARES Act, which contains $376 billion in relief for American workers and small businesses. In addition to traditional Small Business Administration (“SBA”)  funding programs, the CARES Act established several new SBA temporary programs to address the COVID-19 outbreak.

The two primary programs are the Paycheck Protection Program (“PPP”) and the Economic Injury Disaster Loan (“EIDL”). 

How is the PPP different from the EIDL?

The PPP is a nearly $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans. Specifically, the PPP is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. If the small business keeps employees on the payroll for eight weeks and the loan funding is used primarily for payroll, and, to a lesser extent, for rent, mortgage interest or utilities, the SBA will forgive the loan amount. Unlike the EIDL, small businesses apply for a PPP loan through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating in the program.

In contrast, the EIDL program is an existing loan facility operated by the SBA. The purpose of the EIDL program is to extend low-interest credit to small businesses that are impacted by disasters. Historically, the availability of the EIDL program has been based upon the declaration of a disaster in a state or region that is approved by the federal government. Under the CARES Act, the coronavirus was declared a disaster, allowing affected businesses to apply for an EIDL. The CARES Act also modified the EIDL program, relaxing qualification requirements, increasing funds, and providing for a $10,000 advance from the SBA within three days of a completed application by a qualifying business. This cash advance will not need to be repaid, even if the qualifying business is denied an EIDL. Businesses apply for an EIDL directly from the SBA.

What are the eligibility requirements?

All businesses, including 501(c)(3) non-profit organizations, veterans organizations, Tribal business concerns, self-proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply for a PPP loan. The business must have been in operation on February 15, 2020 and either had employees for whom the business paid salaries and payroll taxes or paid independent contractors, as reported on a Form 1099-MISC. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries. Please note that the SBA’s affiliation standards do apply, but are waived for small businesses in the hotel and food services industries; small businesses that are franchises in the SBA’s Franchise Directory; or small businesses that receive financial assistance from small business investment companies licensed by the SBA.

All businesses with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), and private non-profit organizations may apply for EIDL. Unlike the PPP, non-profit organizations do not have to be a 501(c)(3) or 501(c)(19) organization. Rather, the organization must be a private non-profit organization that is a non-governmental agency or entity that currently has an effective ruling letter from the IRS granting tax exemption under sections 501(c),(d), or (e) of the Internal Revenue Code of 1954, or satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law, or a faith-based organization. As a result, community associations (i.e., condo associations and homeowners associations) who are registered with the state as a nonprofit organization are eligible to apply under the EIDL program.

What are the loan amounts?

Under the PPP, the maximum loan amount available for an eligible borrower is the lesser of (i) $10 million, or (ii) the sum of the average monthly payments for payroll costs for the borrower in the one-year period immediately preceding the loan date times 2.5.

Under the EIDL, the maximum loan is $2,000,000. But the loan amount requested must be based upon the economic injury suffered by the business as a result of the coronavirus. Moreover, the EIDL provides businesses who apply for a loan a cash advance of not more than $10,000. The CARES Act requires that the cash advance be used for one of the following purposes: providing sick leave to employees, maintaining payroll, meeting increased costs to obtain materials, making rent or mortgage payments, or repaying obligations that cannot be met due to revenue losses. The applicant is not required to repay the advance, even if the business is subsequently denied an EIDL. Please note that if the business receives a PPP Loan, the cash advance will be subtracted from the amount of the PPP Loan that is eligible for loan forgiveness.

Do I need collateral or a guarantee?

Under the PPP, collateral or a guarantee is not required.

Under the EILD, collateral is required on loan amounts greater than $25,000. Guarantee is required on loan amounts greater than $200,000.

What are the interest rates and fees?

The interest rate for PPP loans is currently 1% with a maximum of 4% fixed. There are no participation or pre-payment fees. Principal and interest are deferred for 6 to 12 months. SBA 7(A) lenders are entitled to limited lending fees as outlined by the PPP.

The interest rate under the EIDL program varies on the type of entity. Specifically, the interest rate is 3.75% for businesses and 2.75% for non-profit organizations. Similar to PPP, there are no participation or pre-payment fees. Principal and interest, however, are deferred for a full 12-months.

Can the loan amounts really be forgiven?

The EIDL program does not provide loan forgiveness. Alternatively, PPP loans may be forgiven based on how the funds are utilized between the date it is received and the ensuring 8 weeks. In order for the loan to be fully forgiven, the funds must be used as payment for (i) payroll costs, (ii) mortgage interest, (iii) rent, and (iv) utilities. Please note that payroll costs are capped at $100,000 on an annualized basis for each employee. Due to likely high subscription, the SBA anticipates that not more than 25% of the forgiven amount may be for non-payroll costs.

The amount the loan may be forgiven may be subject to a reduction if the borrower reduces its number of employees or their salaries during the 8-week period. But that reduction may be recovered by the borrower simply refilling a position or raising wages prior to June 30, 2020.

What is the term of the loan?

If there is a remaining principal amount on a PPP loan after forgiveness, then the remaining amount will continue as an SBA-guaranteed loan with a maturity date that may not exceed 10 years from the date on which the borrower applied for loan forgiveness.

Under the EIDL program, the term of loan may not exceed 30 years.

How can I apply for each program?

Applications for the PPP loan can be found by clicking HERE

Applications for EIDL can be found by clicking HERE

The WCZ COVID-19 Response Team offers 24/7 access to attorneys for our clients’ needs with respect to both programs. Please contact WCZ COVID-19 Response Team if you have any questions or need timely legal assistance.