PPP Loans vs. EIDL vs. Grants: Which One is Right for Your Small Business?
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In March, Congress added more funds to the Paycheck Protection Program (PPP) and COVID-19 Economic Injury Disaster Loan (EIDL). Both loans have low-interest rates and portions that may not need to be repaid.
However, there are significant differences, too, and new programs to consider that aren’t loans but cash money grants. You could apply for a PPP, EIDL or both, but you may not be able to apply for a loan once you receive a grant. It’s important to consider your business’s financial needs, staffing and long-term outlook when deciding between SBA loans and grants.
PPP loans vs. EIDL vs. grants: How they stack up
The Paycheck Protection Program and COVID-19 Economic Injury Disaster Loan are the two federal loan programs for small business owners affected by the coronavirus pandemic. They have been joined by two new grants: the Shuttered Venue Operators Grant (SVOG) and Restaurant Revitalization Fund (RRF). Though all four programs are overseen by the U.S. Small Business Administration (SBA), there are big differences between them.
|Comparing COVID-19 relief programs|
|Maximum Amount||$10 million ($2 million for second-time borrowers)||$500,000||$10 million||$10 million ($5 million per restaurant location)|
|Eligible recipients||Small business owners, nonprofits||Small business owners, nonprofits||Venue operators||Restaurants|
|Repayment necessary?||No, if at least 60% of funds are used for payroll||Yes, but a cash advance does not need to be repaid||No, but you must qualify||No, but you must qualify|
|Combine programs?||May apply for 2 PPP loans + EIDL, as long as they’re used for different purposes||May apply for 1 EIDL and the Targeted EIDL Advance, if you qualify||May apply for up to 2 SVOGs + EIDL. May not apply for PPP after receiving SVOG.||May apply for RRF + EIDL. May not apply for PPP after receiving RRF.|
Which one is right for my small business?
Let’s take a quick look at each program.
Best for: Small business owners who need help now with payroll expenses.
The Paycheck Protection Program was created through the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act in March 2020 and revived in December 2020. Congress injected more money into the program in March 2021 through the American Rescue Plan Act and later extended the deadline to May 31, 2021 to apply. The SBA has until June 30, 2021 to process those applications.
|PPP loans: At a glance|
|Maximum interest rate: 1% fixed interest||Maximum terms: 5 years||Collateral: Not required||Apply: With an SBA-approved lender||Uses: See below|
As we mentioned earlier, loans are available up to $10 million for first-time borrowers and $2 million for second-time borrowers. Businesses eligible for a first-draw loan include sole proprietors, independent contractors, self-employed business owners and any business or nonprofit organization that meets the SBA’s size standards. Second-draw loans are for eligible businesses with more than 300 employees that can demonstrate a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
Maximum loan amount calculation: In general, your maximum loan amount would depend on your average monthly payroll costs for 2019 or 2020. You would multiply that number by 2.5 to determine the highest amount you could borrow. First-time borrowers can find more information here; second-time borrowers can go here.
New for sole proprietors, independent contractors and self-employed business owners is the ability to use your gross income instead of your net income for calculating your maximum loan amount.
PPP loans may be forgiven if funds are spent on specific expenses during an eight or 24-week period including:
- Mortgage interest or rent payments
- Payroll costs
- Operational expenses as a result of the pandemic (software, cloud computing, human resources and accounting)
- Property damage as a result of civil unrest in 2020 (expenses not covered by insurance)
- Supplier costs as a result of the pandemic
- Worker protection expenditures (personal protective equipment)
Borrowers could use loan funds for other expenses, but any money spent on anything outside 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 eight- or 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 May 31, 2021 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 have a five-year repayment term with 1% interest.
Apply for the Paycheck Protection Program (PPP) at BlueVine
Best for: Small businesses unable to pay a variety of daily expenses. Businesses in low-income communities may be best suited for the Targeted EIDL Advance.
Early in the pandemic, the SBA expanded its existing Economic Injury Disaster Loan program to create a new COVID-19 EIDL. COVID-19 EIDLs up to $500,000 are available plus a $10,000 Targeted EIDL Advance that does not need to be repaid. After discontinuing the initial EIDL Advance in July 2020, Congress replaced it with the Targeted EIDL Advance in December 2020. Businesses must meet stricter eligibility requirements to receive the advance.
|EIDLs: At a glance|
|Maximum interest rate: 3.75% for businesses; 2.75% for nonprofits||Maximum terms: 30 years||Collateral: Required for loans > $25,000||Apply: Directly to the SBA; eligible advance recipients will receive an email invite||Uses: 24 months of working capital|
Unlike the PPP, which is funneled through banks, EIDLs are funded directly through the SBA. Companies must show a greater need for the EIDL Targeted Advance — an economic loss of 30% or more — than the EDIL loan. EIDL loan 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.
SBA grants for restaurant, venue operators
Restaurants, theaters, museums, live performing arts organizations and others have been particularly hard hit by the pandemic. If your business falls into one of these categories, check out the eligibility criteria, below, and apply. This is money that does not need to be repaid, though you will need to track your expenses.
Shuttered Venue Operators Grant (SVOG)
Best for: Operators of theaters, museums, live performing arts organizations, independent movie theaters and other venues.
The program was first created in December 2020 but received a boost in funding from the American Rescue Plan Act passed in March 2021. Money may be used for payroll, rent or mortgage payments, utilities, administrative costs and other business expenses.
|SVOG: At a glance|
|No repayment necessary||Maximum amount: $10 million||Eligibility: See eligible entities here||Apply: Here, starting in April|
Grant amounts are based on an entity’s gross earned revenue:
- Entities in operation on Jan. 1, 2019: 45% of 2019 gross earned revenue OR $10 million, whichever is less
- Entities that began operations after Jan. 1, 2019: Average monthly gross revenue in 2019 x 6 OR $10 million, whichever is less.
Application priority will be given to businesses that suffered the greatest losses. Here’s the breakdown:
- First 14 days: Entities that suffered 90% or greater revenue loss between April and December 2020
- Next 14 days: Entities that suffered 70% or greater revenue loss between April and December 2020
- 28 days after first and second groups: Entities that suffered a 25% or greater revenue loss between one quarter of 2019 and corresponding quarter of 2020
Business owners can prepare for April’s application window by registering for the federal government’s System for Award Management (SAM) system. You will also need a data universal numbering system (DUNS) number. Interested business owners may also watch an SBA webinar here.
Restaurant Revitalization Fund (RRF)
Best for: Restaurant owners and groups.
The newest kid on the block, the $28.6 billion RRF was created in the American Rescue Plan Act. Money may be used for payroll, rent or mortgage expenses, utilities, maintenance, supplies, food, operational expenses, supplier costs and more.
|RRF: At a glance|
|No repayment necessary||Maximum amount: $10 million||Eligibility: See eligible entities here||Apply: Date TBD|
Restaurants could receive a grant equal to the difference between their 2020 and 2019 gross receipts.
PPP loans vs. EIDL vs. grants: What to consider
Whether a PPP loan or an EIDL would be the best solution for businesses that don’t qualify for one of the new grants — or don’t want to wait — 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 advisor, such as an attorney or an accountant, to determine your business’s financial standing and navigate the loan application process. And keep in mind that the SBA may continue to release new information regarding PPP loans and EIDLs.
“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 be a more attractive option than PPP loans, especially to self-employed business owners or those who operate smaller businesses, Vlietstra said. 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
On the other hand, EIDLs would need to be repaid, with interest, while PPP loans would be eligible for full loan forgiveness, including any interest accrued. With the application window closing fast for the PPP, you may need to make a decision fairly quickly.
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. EIDL payments may be deferred for 18 months (24 months for loans made in 2020).
If you can’t decide, apply for multiple forms of aid
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. Eligible restaurant or venue operators could then apply for a grant as well — there may be restrictions on using multiple programs for the same expenses, however, and you’ll need to keep records of your expenses.