As the State and Federal government continue to roll out programs to assist small businesses, I want to provide information on the difference between the Paycheck Protection Program and the Economic Injury Disaster Loans. Below you will find the answers to several of the most frequent questions I’ve received.
Paycheck Protection Program
The CARES Act authorized, among other things, the Small Business Administration (SBA) to expand its loan program, creating the Paycheck Protection Program (PPP), which provides small businesses with funds, in the form of a loan, to pay up to 8 weeks of payroll costs including benefits.
Who can apply?
Small businesses with 500 or fewer employees - including nonprofits, veteran organizations, tribal business concerns, sole proprietorships, self-employed individuals, independent contractors, churches and religious nonprofits - can apply. Businesses with more than 500 employees are eligible in certain industries. For more information on eligibility, click HERE. To complete the application, click HERE. For a list of SBA approved lenders to submit you application to, click HERE.
When can I apply?
Staring April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
Starting April 10, 2020, independent contractors and self-employed individuals can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.
What can I use this loan for?
You should use the proceeds from these loans on your:
- Payroll costs, including benefits
- Interest on mortgage obligations
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020
At least 75% of the loan proceeds must be used for payroll costs and benefits. For information regarding what counts as payroll costs and benefits, click HERE.
NOTE: Although PPP covers paid sick leave, the Families First Coronavirus Response Act provides small business owners with refundable tax credits for paid sick leave related to COVID-19. For more information, click HERE.
How much can I borrow?
Loans can be for up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount with a cap of $10 million. If you’re a seasonal or new business, you will use different applicable time periods for your calculation. Payroll costs will be capped at $100,000 annualized for each employee.
How many PPP loans can I apply for?
You can receive one PPP loan only. All applications must be processed by June 30, 2020. Loans are first come, first serve. To start the PPP Borrower Application Form, click HERE.
What is the term of the loan?
The term of the loan will be 2 years with no prepayment penalties or fees. Loan payments will be deferred for 6 months; though interest will accrue over this period.
What is the interest rate?
1.00% fixed interest rate.
Do I need to pledge any collateral for this loan?
No. No collateral is required.
Do I need to personally guarantee this loan?
No. There is no personal guarantee requirement.
Will these loans be forgiven?
Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (no more than 25% will be forgiven in non-payroll costs). For a sole proprietor or independent contractor; wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee. Payroll costs will be capped at $100,000 annualized for each employee.
What should I use this loan for?
Given the loan terms, the Paycheck Protection Program could potentially be the cheapest option for many small businesses. It is important to note that any non-payroll expenses will not be forgiven and must be repaid in 2 years. If funds will be used to make large purchases (i.e. inventory) and would be impossible to pay back in two years, the Economic Injury Disaster Loan might be a better fit for your needs, which can provide up to a 30 year term.
Can I apply for both the PPP and the Economic Injury Disaster Loan?
Yes, you are allowed to apply and possibly receive both the PPP and Economic Injury Disaster Loan. These programs serve different purposes and are meant to compliment each other. You may wish to apply for both if, in additional to payroll, you have other large expenses that might be difficult to repay in two years.
For further details on the Paycheck Protection Program, please click HERE.
Economic Injury Disaster Loans
Who can apply?
Small businesses, small agricultural cooperatives, small businesses engaged in aquaculture, and most private and non-profit organizations of all sizes.
When can I apply?
The application window is currently open for eligible organizations to apply for an Economic Injury Disaster Loan . To apply, please click HERE.
For further details on Economic Injury Disaster Loans, please click HERE.
How large can my loan be?
The law limits the loans to $2 million for alleviating economic injury caused by the disaster. The actual amount of each loan is limited to the economic injury determined by SBA.
What is the term of the loan?
The law authorizes loan terms up to a maximum of 30 years. SBA will determine an appropriate installment payment based on the financial condition of each borrower, which in turn will determine the loan term.
What is the interest rate?
3.75% for small businesses and 2.75% interest for non-profits.
Do I need to pledge any collateral for this loan?
Yes. The SBA takes real estate as collateral when it’s available. SBA will not decline a loan for lack of collateral, but SBA will require the borrower to pledge collateral that is available.
Do I need to personally guarantee this loan?
No. Though to protect each borrower and the agency, SBA may require you to obtain and maintain appropriate insurance.
Will these loans be forgiven?
No. The Economic Injury Disaster Loans will need to be repaid in full plus interest.
What should I use this loan for?
Given the loan terms, the Paycheck Protection Program could potentially be the cheapest option for many businesses. It’s important to note that any non-payroll expenses will not be forgiven and must be repaid in 2 years. If funds will be used to make large purchases (i.e. inventory) and would be impossible to pay back in two years, the Economic Injury Disaster Loan might be a better fit for your needs, which can provide up to a 30 years term.
Can I apply for both the PPP and the Economic Injury Disaster Loan?
Yes, you are allowed to apply and possibly receive both the PPP and Economic Injury Disaster Loan. These programs serve different purposes and are meant to compliment each other. You may wish to apply for both if, in additional to payroll, you have other large expenses that might be difficult to repay in two years.