PPP Loans vs. EIDL: Which One is Right for Your Small Business?
Note: The PPP closed Aug. 8, 2020 and the SBA is no longer accepting new applications. The SBA continues to accept new EIDL applications from eligible small businesses, private nonprofits and agricultural businesses. However, the SBA closed the EIDL advance program on July 11. This page will be updated as each program’s status develops.
Most small business owners affected by the coronavirus pandemic can apply for federal loan relief. The Paycheck Protection Program (PPP) loan and Economic Injury Disaster Loan (EIDL) both 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. And with business owners reporting problems and calling for additional federal funds, these programs aren’t your only choice — you could also consider other emergency loans, as well as local and regional assistance.
- 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 off to a rocky start
PPP loans vs. EIDL: How they stack up
Let’s take a quick look at each program.
PPP is new, a product of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. It provides forgivable loans up to $10 million to cover payroll costs during the COVID-19 outbreak.
EIDLs previously existed, but have been expanded as a result of the pandemic. They provide low-interest funding up to $2 million to cover a broader range of business expenses than what PPP loans cover. While you wait for the EIDL, eligible recipients could get a cash advance up to $1,000 per employee, for a total of up to $10,000, that does not need to be repaid and may be used for almost any business purpose.
Here’s a breakdown of the details:
|Paycheck Protection Program Loans||Economic Injury Disaster Loans|
|Loan purpose||Mortgage interest or rent payments, utilities and payroll costs, including:
||General business expenses, such as payroll, fixed debts and accounts payable|
|Amount||Up to $10 million||Up to $2 million|
|Maximum interest rate||1% fixed interest||
|Maximum repayment terms||5 years||30 years|
|Loan forgiveness available||Yes – For 24 weeks’ worth of approved payroll and rent or mortgage expenses only, with 60% going toward payroll costs.||No. Eligible applicants may receive a cash advance up to $10,000 that does not need to be repaid.|
|Collateral||Not required||Not required for loans up to $25,000. Loans exceeding $25,000 would require a general security interest in business assets as collateral.|
|Personal guarantee||Not required||Not required for loans up to $200,000.|
|Where to apply||SBA-approved banks and credit unions are accepting applications.||U.S. Small Business Administration|
|Application deadline||Aug. 8, 2020||Dec. 21, 2020|
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, 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.
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. On June 5, the Paycheck Protection Program Flexibility Act amended several aspects of PPP loan forgiveness, including the time allotted to spend funds and the amount business owners must spend on payroll. Repayment terms have also been extended for those who do not qualify for loan forgiveness.
Loans are available up to $10 million with a 100% SBA guarantee. The SBA offers loan forgiveness for funds spent on specific expenses during the 24 weeks following loan origination, including:
- Mortgage interest or rent payments
- Payroll costs
- Employee salaries
- Paid sick or medical leave
- Insurance premiums
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 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 Dec. 31 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.
Have additional questions about the PPP? Check out these FAQs.
Best for: Small businesses unable to pay a variety of daily expenses, including payroll, accounts payable and other fixed debts. The program opened on April 3 but closed on April 15 when funds were depleted. Congress replenished the program, and the SBA reopened the program to all businesses on June 15.
The SBA expanded its existing Economic Injury Disaster Loans program to incorporate businesses impacted by the COVID-19 outbreak. EIDLs are intended to supplement the temporary loss of revenue small businesses are experiencing as a result of the pandemic. Business owners would show losses as of Jan. 31, 2020 in comparison with 2019 financials. These disaster loans are available up to $2 million, with a 3.75% interest rate for small businesses and a 2.75% rate for nonprofits.
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.
Unlike PPP loans, EIDLs are direct loans, funded through the U.S. Treasury Department. Rather than applying through a partner lending institution, as you would to obtain a PPP loan, you would apply directly through the SBA to get a disaster loan.
Disaster loan advance: While waiting to receive your EIDL, you could qualify for an advance on your loan up to $10,000; this portion of your loan would not need to be repaid. You must request the advance in your EIDL application to be considered. The SBA should issue an EIDL advance within three days of receiving a successful disaster loan application.
Have additional questions about EIDL? Check out these FAQs.
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.
“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. However, any advance amount you receive up to $10,000 would be deducted from the PPP loan amount eligible for forgiveness.
“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.
A third option
Small businesses will soon have a third option to choose from when the Federal Reserve opens its Main Street Lending Program. However, the program may be best for mid-sized businesses: loans start at $500,000. Even though borrowers don’t have to make payments for the first year, Main Street loans are not forgivable like PPP loans.
PPP loans off to a rocky start
The ambitious loan program had a chaotic rollout starting April 3, and ran out of money on April 16. Congress approved another $370 billion for the PPP and EIDL on April 24 — $310 billion for PPP loans, $50 billion for EIDLs and $10 billion for EIDL advances. The SBA reopened the PPP application window on April 27. Demand has been slower in the second round of funding, but early results show that loans may be reaching a greater range of businesses.
Confusion over eligibility
Despite being told that they could apply to any existing SBA 7(a) lender or other participating institution, small business owners encountered unexpected obstacles. Bank of America, for example, originally prioritized customers who had previously borrowed from the bank, but has since begun allowing small business owners who do not meet that requirement to work directly with a banker to apply for a PPP loan.
Consider a community bank instead
Large banks have grabbed headlines, but community banks have processed most of the PPP loans so far. And more may come online: the SBA has made a new form available for non-SBA lenders to receive authority to issue PPP loans under the program, as long as they are federally insured institutions.
Community-based banks were already among the most active SBA lenders, alongside giants like Wells Fargo and Bank of America. Small banks and credit unions have been promised a share of the second round of funding. Of the $310 billion for PPP loans, Congress allocated $30 for banks with $10 billion to $50 billion in assets and $30 billion for institutions with less than $10 billion in assets.
Non-bank business lenders, such as Kabbage and PayPal, have also been approved to process PPP loans. You can submit a PPP application online.