SBA Emergency Loans: Paycheck Protection Program vs. Disaster Loans

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With the passage of the CARES Act, the small business world has been buzzing with news of $350 billion set aside for SBA loans. If your business is in need of help to get through the coronavirus crisis, these loans may be a great option for you. But before you head to the Small Business Administration (SBA) website and start filling out forms, know that there are two primary loans available:

The Paycheck Protection Program loans pull from the $350 billion set aside in the CARES Act and are an incentive to keep workers on your payroll. The Economic Injury Disaster Loans are not part of the recent bill but are still an option for businesses that have been hit hard by the coronavirus pandemic. 

We’re breaking down everything you need to know about these two options so that you can apply for the loans you need to keep your business going. 

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The Paycheck Protection Program

The Paycheck Protection Program is part of the stimulus bill that was passed on March 27, 2020 (the same bill that includes plans to send Americans checks for up to $1,200). This bill sets aside an additional $350 billion in funding that the SBA can distribute to small businesses that need immediate help. Interested businesses can begin applying April 3, 2020.

Unlike a disaster relief loan, which we’ll go into in more detail on shortly, these loans have a very specific use: to protect your workers’ paychecks. 

The way that this bill incentivizes employers to keep workers on the payroll is through loan forgiveness. If you can prove that you spent the funds on payroll or other essential expenses, like rent or utilities, portions or all of the loan may be forgiven. The loan amount will also be based on your average monthly payroll expenses. 

The SBA distributes other loans through its 7(a) loan program. Paycheck Protection Program (PPP) loans technically fall under that program, meaning that you can apply for the loan through any lender that participates. But, if you’re familiar with the terms of 7(a) loans, PPP loans stray from those terms in a few ways. 

How Are PPP Loans Different from Standard 7(a) Loans? 

  • The SBA guarantees 100% of Paycheck Protection Program loans. Standard 7(a) loans that are under $150,000 are guaranteed to 85%, while any loans over that amount are guaranteed to 75%. 
  • PPP loans are available to any business with fewer than 500 employees, including contractors and sole proprietors. Standard 7(a) loans usually have revenue requirements as well to restrict lending to what it considers small businesses. 
  • PPP waives the traditional fees of the standard 7(a) loan. 
  • PPP loans don’t require a personal guarantee or collateral. 
  • PPP loans can be forgiven, depending on how the funds are spent. 

Economic Injury Disaster Loans

Disaster loans are always offered by the SBA and are not a part of the recent legislation. Historically, disaster loans are often employed after devastating weather events. Once a local or state government declares a region a “disaster zone” businesses in that region are eligible to apply for funds. 

In the case of the COVID-19 outbreak, any business across the country that has been negatively impacted by the virus is considered eligible for disaster relief. 

Typically, these loans are cumbersome to apply for, since you need to quantify the damage done to your business as a result of the disaster. The SBA has released a streamlined application process for disaster loan advances, but businesses going this route should be prepared with financial statements and past tax returns. 

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Which Loan Should I Apply For? 

Aside from the big-picture goals of each loan type, there are several more differences between the two. Here’s a quick overview of some of the key points on which these loans differ so that you can weigh your options as a business. 

Paycheck Protection Program (PPP)Economic Injury Disaster Loan (EIDL)
EligibilityBusiness under 500 employees (full-time and part-time)

Independent contractor, sole proprietorship, or self-employed Must have been affected by COVID-19
Private and non-profit organizations, not restricted to small businesses only

Must have sustained economic injury from a declared disaster
Administered ThroughLocal banks & lenders, starting April 3, 2020. 

More specifically, any existing SBA 7(a) lender or a federally insured depository institution, federally insured credit union, and Farm Credit System institution that participates. 
The Small Business Administration (SBA) 
Loan Amount Based OnLoan will be calculated by multiplying 2.5 by one of the following: 

2019 average monthly payroll expense (excluding salaries over $100,000)

If not in business in 2019, average monthly payroll expense for January and February 2020 
Amount of economic injury sustained
Max. Amount$10,000,000$2,000,000*

*Note: The SBA is offering an advance of $10,000 in response to COVID-19 to speed up the process. 
Personal LiabilityNo personal guarantee or collateral required. For loans under $200,000, no personal guarantee or collateral is required. 
Repayment TermsMaturity date is 2 years. 

The SBA has set the interest rate is set at 0.5% (though the CARES Act caps the rate at 4%). 

Fees, interest, and amortization payments are deferred for 6-12 months.
The interest rate is 3.75% for businesses and 2.75% for non-profits. Term length can vary, usually between 15-30 years. 
Forgiveness TermsTo be eligible, funds must be spent on the following during the 8-week period after the loan origination to be forgiven:

Interest on mortgage obligations
Additional wages for tipped employees

*At least 75% of the forgiven amount must be used on payroll. 
Economic Injury Disaster Loans do not offer loan forgiveness for businesses that continue to operate. 

ApplicationSample ApplicationApply Here 

Am I Eligible for PPP Loan Forgiveness if I’ve Made Layoffs? 

Paycheck Protection Program loans can be forgiven in full if the funds are spent on payroll and the other essential expenses listed in the chart above during the 8-week period after the start of the loan. 

If your headcount decreases or if wages decrease by more than 25%, you will only be forgiven for part of the loan. It will be decreased in proportion to the drop in headcount or wage payments. 

If you’ve already made layoffs, don’t worry yet. If you are able to bring your headcount and average wage payments up to pre-crisis levels by June 30, 2020, you will be eligible for loan forgiveness. 

Can I Apply for Both Loans?

The short answer is: yes. Businesses that have already applied to Disaster Loans can also apply for a Paycheck Protection Program loan. However, businesses cannot apply for both loans if they are for the same purpose and amount.

This is a special case due to the COVID-19 crisis. Traditionally, you would not be able to receive multiple loans from the SBA. 

How to Apply for a PPP Loan

If you’re ready to apply for a Paycheck Protection Program loan, the first step is to find a participating lender. If you have worked with a lender before, start there and ask if they’re qualified to help. (In other words, that they are authorized to make 7(a) loans.) If not, here’s a list of participating lenders provided by the SBA.

When you speak to that lender and begin to fill out your application, you’ll be asked for two metrics that will help calculate how much you’re eligible for:

  • Average monthly payroll. This can be found through your payroll provider or by reviewing your accounting file for past payroll expenses. For businesses that were operating in 2019, you should average your monthly payroll expenses for the full year. For those that weren’t operating, you can average your payroll costs for the first two months of 2020.
    • Please Note: Your calculation must exclude salaries over $100,000. Seasonal businesses are also allowed to calculate average payroll costs between February 15 – June 30, 2019, instead of the full year.
  • Number of jobs. This should include all full-time and part-time employees.
    • Please Note: The SBA has issued new guidance on the loans that says contractors and freelancers you employ should not be counted toward your average payroll expenses or the number of jobs. Those workers are eligible to apply for this loan individually to compensate for lost income.

How to Apply for an EIDL Loan Advance

The streamlined application process makes applying for the loan advance pretty straightforward. If you’re ready to apply, here are the numbers you’ll be asked to provide in addition to basic information about your business.

Everyone Must Provide:

If any of the following apply to your business, you’ll also provide:

  • Rental Properties: Amount of lost rent due to the disaster.
  • Non-Profit: Cost of operation for 12 months before January 31, 2020.
  • Faith-Based Entity: Combined annual operating expenses for 12 months before January 31, 2020, for all secular social services and a list of all secular social services.
  • Other: Any additional compensation from other sources as a result of the disaster and a description of those compensation sources.

We’re doing our best to keep our blog posts updated with the latest content. To be the first to hear about new developments and changes, be sure to follow us on Twitter and Instagram.

Not sure whether your books are clean enough for lenders’ eyes? ScaleFactor has created a free QuickBooks Online report to check on the state of your books. It looks for things like the last time your accounts were reconciled or any outstanding accounts receivables you might need to recognize. Give it a try and discover ways to improve the state of your books.

The materials in this communication are made available by ScaleFactor, Inc. for educational and informational purposes only and do not constitute legal advice. If these materials are inconsistent with governmental interpretation of the Act, ScaleFactor assumes no liability.  You are advised to seek outside counsel in the event you have specific questions regarding the Act. 

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