Paycheck Protection Program and Emergency Injury Disaster Loan
The year 2020 has been full of new experiences and vast economic disruptions. On March 27th the federal government passed the CARES Act to provide relief to small businesses during the Coronavirus pandemic. In this article we will examine how business owners can take advantage of this relief bill by breaking down the complexities of the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL).
Paycheck Protection Program
What is the Paycheck Protection Program? Well, it’s exactly what it says. The PPP is a loan program originates from the CARES Act which authorizes up to $349 billion in forgivable loans to small business to pay their employees during this time of economic hardship.
Who is eligible to apply for it?
You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States, these include;
Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern.
Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location.
Sole proprietors, independent contractors, and self-employed persons
How much can one business receive in the PPP?
Eligible businesses can borrow up to 2.5 times your payroll expense or $10 million calculated based on their payroll records, which turns into a five-year note at a fixed interest rate of 1% if not forgiven. Keep in mind that the deadline to apply for a PPP loan is August 8th.
How does loan forgiveness work?
According to the SBA forgiveness
is based on the employer maintaining or rehiring employees before 31st December and also maintain salary levels. Loan forgiveness program requires the loan recipient to spend 60% of the aid on payroll cost and 40% on eligible non-payroll expenses such as mortgage interest, rent, utilities.
Eligible expenses must be incurred over 24 weeks, starting from the day you received the first disbursement from your lender. However, December 31st, 2020 is the final cutoff date for eligible expenses, this means that if your loan is issued after July 16 you will not be able to take advantage of the full 24-weeks. You will also need to prove your expenses for utilities, rent, and mortgage interest.
Economic Injury Disaster
In response to the Coronavirus (COVID-19) pandemic, small business owners were able to apply for an Economic Injury Disaster Loan and an advance of up to $10,000 to support their business. The advance does not have to be repaid but the amount will be deducted from the total loan eligibility.
Who is eligible to apply for it?
You are eligible for an EIDL if your business meets the definition and size of a small business located in the US. According to the Small Business Administration a small business:
Is organized for profit.
Has a place of business in the U.S. Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
Is independently owned and operated.
Is not dominant in its field on a national basis.
How much can one business receive in an EIDL?
The SBA can provide up to $2 million in disaster assistance to a business. The repayment term is determined by the business’s ability to repay the loan and can be up to 30-years. This loan will be charged 3.75% interest and collateral might be required depending on the loan amount.
Can one receive both these loans?
Being a small business owner during these times can be tough. Good news for you is that you can and should apply for both loans in order to take full advantage of these programs to support your business. Some key things to remember when using funds from PPP and EIDL together:
If you receive an EIDL advance and a PPP loan, proceeds from the advance will be deducted from the loan forgiveness amount.
You cannot use funds from both loans for the same purpose, for example, you can’t use funds from both EIDL and PPP towards payroll costs.
If you took out an EIDL before April 3, 2020, and used it for payroll expenses, you must refinance the EIDL by carrying over the EIDL balance into your PPP loan.