PPP Loans vs. EIDL: Which One is Right for Your Small Business?
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Congress renewed the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) for 2021, which means struggling business owners once again have federal relief to survive the coronavirus pandemic. Both loans have low interest rates and portions that may not need to be repaid.
However, there are significant differences, too, starting with how you apply. You could 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 vs. EIDL.
- PPP loans vs. EIDL: How they stack up
- Which one is right for my small business?
- PPP loans vs. EIDL: What to consider
PPP loans vs. EIDL: How they stack up
Let’s take a quick look at each program.
PPP was created through the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act in March 2020. After it lapsed on Aug. 8, 2020, a new law in December 2020 revived the program. Lenders began accepting applications from first-time borrowers on Jan. 11, 2021. The U.S. Small Business Administration (SBA) is expected to allow small business owners to take out a second PPP loan up to $2 million starting Jan. 13, 2021.
EIDLs previously existed but were expanded as a result of the pandemic. The SBA extended the $2 million loan program into 2021 and revived the EIDL advance, a grant of up to $10,000 for the most hard-hit businesses.
Here’s a breakdown of the details:
|Paycheck Protection Program Loans||Economic Injury Disaster Loans|
|Loan purpose||Mortgage interest or rent payments, utilities, payroll costs, as well as NEW eligible operating expenses||General business expenses, such as payroll, fixed debts and accounts payable|
|Amount||Up to $2 million*||Up to $2 million|
|Maximum interest rate||1% fixed interest||
|Maximum repayment terms||5 years||30 years|
|Loan forgiveness available||Yes||No. But the EIDL grant does not need to be repaid.|
|Collateral||Not required||Yes, for loans >$25,000|
|Personal guarantee||Not required||Yes, for loans >$200,000|
|Where to apply||SBA-approved lenders will accept applications.||U.S. Small Business Administration|
|Application deadline||March 31, 2021||Dec. 31, 2021|
*For second-time borrowers. First-time borrowers may be eligible to borrow up to $10 million.
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 — 300 in some cases — 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.
New types of businesses are now permitted to apply for PPP loans. Business leagues that are categorized as 501(c)(6) organizations, such as chambers of commerce, are now eligible for PPP funding. Conversely, the new legislation prohibits publicly traded companies from the program.
Which one is right for my small business?
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. It may not be right for business owners who aren’t able to keep or bring back workers and are worried about loan forgiveness.
Paycheck Protection Program loans are designed to incentivize small business owners to retain employees during the COVID-19 crisis. Loans are available from $2 million to possibly $10 million with a 100% SBA guarantee. They may be forgiven if funds are spent on specific expenses during an eight or 24-week period including:
- Mortgage interest or rent payments
- Payroll costs
- Employee salaries
- Paid sick or medical leave
- Insurance premiums
- NEW eligible expenses:
- Operational expenses as a result of the pandemic (software, cloud computing, human resources and accounting)
- Property damage as a result of civil unrest in 2020 (expenses not covered by insurance)
- Supplier costs as a result of the pandemic
- Worker protection expenditures (personal protective equipment)
Borrowers could use loan funds for other expenses, but any money spent on anything outside of SBA-approved expenses would not be forgiven. Additionally, approved payroll expenses do not include employee compensation exceeding $100,000.
Any reduction in employees during the eight- or 24-week period may result in a proportionate reduction in your forgiveness amount. If you laid off employees before receiving your loan, re-hiring those workers before March 31, 2021 could make you eligible for full loan forgiveness. You might also be eligible for full forgiveness if you are unable to find qualified employees to fill those roles or cannot resume normal business operations.
Any amount that is not forgiven would retain its full guarantee, but would have a five-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.
Need a second PPP loan?
That’s now possible thanks to the law passed in December. Business owners may take out a second PPP loan up to 2.5 times their average monthly payroll costs up to $2 million. Businesses in the hospitality industry, including restaurants and hotels, may borrow up to 3.5 times their payroll costs up to $2 million.
All businesses seeking a second PPP loan must have:
- No more than 300 employees.
- Used or plan to use the full amount of their first PPP loan.
- A 25% gross revenue decrease in any quarter of 2020 compared to the same quarter in 2019.
Business expenses covered with a PPP loan are now tax deductible for business owners. Additionally, if you receive an EIDL grant, your grant would not be deducted from your PPP forgiveness amount.
Apply for the Paycheck Protection Program (PPP) at BlueVine
Best for: Small businesses unable to pay a variety of daily expenses, including payroll, accounts payable and other fixed debts. Businesses in low-income communities may be best suited for the EIDL advance.
Early in the pandemic, the SBA expanded its existing Economic Injury Disaster Loan program to incorporate businesses impacted by the COVID-19 outbreak. Disaster loans up to $2 million are available, including an advance up to $10,000 that does not need to be repaid. After discontinuing the advance in July 2020, Congress renewed the program in December 2020.
Unlike the PPP, which is funneled through banks, EIDLs are funded directly through the SBA. Companies also must show a greater need for the EIDL advance than what is required for the PPP. Business owners in low-income areas must demonstrate an economic loss of 30% or more versus the 25% reduction in gross receipts for the PPP. 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.
The SBA should issue an EIDL advance within three days of receiving a successful disaster loan application.
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. And keep in mind that the SBA may continue to release new information regarding PPP loans and EIDLs.
“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 option than PPP loans, especially to self-employed business owners or those who operate smaller businesses, Vlietstra said. Even if you’re not ultimately 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 10 months of deferred loan payments on PPP loans.
If you can’t 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 submit an application for both loans. You may receive the $10,000 advance in the meantime, which you wouldn’t need to repay regardless of whether you’re approved for a disaster loan. And if you’re denied an EIDL, you may be able to receive a PPP loan.
“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.