The number of Americans filing for unemployment hit record highs in March. Thousands of businesses across the country have temporarily—in some cases, permanently—closed their doors due to COVID-19. Business owners and employees are wondering how they’ll manage financially in the coming months.
For some, the answer comes in the form of a federal emergency loan from the Small Business Administration (SBA). Namely, the Economic Injury Disaster Loan (EIDL) or the Paycheck Protection Program (PPP).
Both loans offer low interest rates, fast financial relief for small business owners, and the potential for loan forgiveness to businesses that qualify. Let’s take a look at each in more detail.
EIDLs provide small businesses with working capital loans up to $2 million. Borrowers may use loans to pay fixed debts like rent and utilities. Loans can also cover payroll, accounts payable, and other bills that business owners can’t pay due to the economic impact of the coronavirus.
Borrowers cannot use loans to pay dividends, bonuses, or disbursements to owners unless they’re directly related to business services. Loans also can’t be used for facility expansions, to refinance long-term debt, or pay down other federal loans, among other restrictions.
In addition to the EIDL, small business owners can apply for a loan advance of up to $10,000.
Business owners may receive an advance of funds within days of a successful loan application. Recent and temporary changes to the EIDL program expands the types of small businesses that qualify for the loans. The program now includes tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor. This loan may be forgivable under certain criteria.
Economic Injury Disaster Loan interest rates and important dates
The EIDL interest rate is currently 3.75% for small businesses and 2.75% for nonprofits. To keep monthly payments low, the SBA offers long-term repayment to eligible borrowers—up to 30 years. Repayment terms may be determined on a case-by-case basis and depend on each borrower’s ability to repay.
Loans over $25,000 may require collateral. The SBA is unlikely to decline a loan for lack of collateral but requires borrowers to pledge what they have available. The CARES Act waives personal guarantees on loans under $200,000.
Economic Injury Disaster Loan forgiveness options
Business owners may not have to repay the loan advance of up to $10,000, if certain criteria are met. Through the debt relief program, the SBA will pay the principal and interest on SBA 7(a) loans issued before September 27, 2020, and current SBA 7(a) loans for up to 6 months.
Who is eligible for an Economic Injury Disaster Loan?
In general, small business owners in all U.S. states and territories are eligible to apply if any of the following apply:
- They don’t employ more than 500 employees
- They are a sole proprietor with or without employees or an independent contractor
- They employ more than 500 employees but are considered small under SBA size standards
- Tribal businesses, cooperatives, and ESOPs with fewer than 500 employees.
- They are a private nonprofit organization
If you have an existing SBA loan, you may still qualify for an EIDL. But you cannot consolidate your loans. Potential borrowers must have an acceptable credit score and the ability to repay the loan. You must also prove that your business has suffered substantial economic hardship as a result of the coronavirus.
How to apply for an Economic Injury Disaster Loan
In addition to basic information likes names and addresses, there are a few things you’ll need to include:
- Your federal EIN or Social Security number
- Gross revenue for 12 months
- Cost of goods sold for 12 months
- The date your business was founded
- The number of workers you employ
- Your percentage of business ownership
And it’s a good idea to have the following on hand:
- Tax information authorization (IRS Form 4506T)
- Federal income tax return
- Schedule of liabilities
- Personal financial statements
- Year-to-date profit and loss statements
- Monthly sales figures
Make sure your application is complete before you submit it. Incomplete applications could fall back in the queue, and, as a result, your loan application may take longer to process. If your loan application is denied, you may provide new information and submit a written request for reconsideration.
There is no cost to apply for a loan and no obligation to accept the loan. If the loan is too low, you can submit supporting documentation and request an increase. If the loan is too high, you can request a reduction.
Review the full list of EIDL qualifications or apply now.
The Paycheck Protection Program provides small businesses with loans up to $10 million. The loan is intended to act as a direct incentive for small businesses to keep their workers on the payroll. Borrowers can use PPP loans for payroll, rent, mortgage interest, or utilities. Qualifying loans may be forgiven if borrowers use at least 75% of the loan for payroll purposes for at least eight weeks following the date of the loan, among other eligibility criteria.
Payroll includes compensation, paid leave, group healthcare benefits, retirement benefits, and state and local taxes. Payroll does not include employee or owner compensation over $100,000 or compensation for employees who live outside the U.S. Payroll does not include qualified sick and family leave covered by the Families First Coronavirus Response Act.
Loan amounts are determined by using the business’s average monthly payroll costs from the last year plus 25% of that amount. Payments for loans under the PPP may be deferred for six months.
Paycheck Protection Program interest rates and important dates
Loans issued under the PPP have an interest rate of 1% with a maturity of two years. Initial loan payments may be deferred for six months but will accrue interest. Repayment plans can last up to 10 years.
The PPP will be available through June 30, 2020. Lenders have already begun processing loan applications. The SBA reports that PPP loans do not require any collateral or personal guarantees, and borrowers will never be charged any fees.
Paycheck Protection Program loan forgiveness options
PPP loan forgiveness eligibility is based on several factors, including, but not limited to:
- Borrowers use the majority of the funds for payroll costs—at least 75% of the forgivable amount.
- Borrowers maintain the same number of employees or rehire employees previously laid off due to payroll costs.
- Borrowers maintain employee salary levels.
A forgivable amount may be reduced if the borrower’s number of full-time workers declines or if they decrease salaries and wages after acquiring the loan. Borrowers can apply for forgiveness through a participating lender. Borrowers will likely need to provide supporting documentation that verifies the number of employees on payroll and their pay rates.
Who is eligible for a Paycheck Protection Program loan?
In general, small businesses affected by the coronavirus are eligible to apply. Eligible businesses include:
- Those with fewer than 500 employees, including sole proprietorships, independent contractors, and self-employed workers.
- Private nonprofit organizations.
- Are 501(c)(19) veterans’ organizations.
- Those with more than 500 employees that are considered small under the SBA’s size standards.
Businesses in food or hospitality with several locations may be eligible at the store level if the store employs fewer than 500 workers. In this case, each location could be eligible for an individual PPP loan.
How to apply for a Paycheck Protection Program loan
Apply for a Paycheck Protection Program loan through an SBA 7(a) lender or any federally insured depository institution, credit union, or participating Farm Credit System institution. Consult your local lender to see if they are participating in the program.
To apply, you’ll need a few things:
- Your federal EIN or Social Security number.
- Your average monthly payroll for 2019.
- The number of workers you employ.
- Your percentage of business ownership.
If you already have an SBA loan but need more funding, the Express Bridge Loan Pilot Program may help you access to up to $25,000 more. And if you’re applying for an EIDL, that $25,000 may also help tide you over while you wait. If you receive an EIDL, your $25,000 bridge loan may be repaid in full or in part by that loan.
Here are some eligibility requirements of the Express Bridge Loan Pilot Program:
- You must certify that you cannot receive the credit you want with “reasonable terms” from any other non-federal sources.
- You must show that you can’t get the funds you want from any resources you own. Resources include but not limited to liquid assets such as savings accounts, stocks, and bonds.
- If anyone else owns at least 20% of the business, they also must show they don’t have liquid assets that could be otherwise used.
Determining which loan is right for your business
When considering each loan, consider the eligibility requirements, how much capital your business needs, and how your business would use the funds.
If you’ve laid off or furloughed employees due to payroll costs, the PPP might be the right fit for your business. PPP loans can help you to rehire or retain employees. And forgiveness may be available under certain criteria.
If miscellaneous business costs are eating up your business’s cash reserve, the EIDL might be the right direction. This loan may be used to pay fixed debts like rent and utilities and to keep your business running on the back end.
Remember, depending on eligibility criteria, your business loan may be forgivable or subject to various repayment plans, which helps make these loans affordable.
Can small businesses apply for PPP loans and EIDLs?
Small business owners can apply for the loans and decide which one to choose. However, these loans are limited to one per TIN. Small business owners cannot get both at the same time.
If you took out an EIDL but think the PPP is a better fit for your business, you can refinance your EIDL into a PPP loan. The outstanding loan amount would be added to the payroll sum.
When in doubt, work with a financial advisor to choose the most beneficial loan for your business.
The resources described above are made available to businesses within the United States of America.
COVID-19 relief programs are evolving regularly. Please visit SBA.gov for the most up to date information.
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