Economic Injury Disaster (EIDL) Loans VS Paycheck Protection Program (PPP) Loans: What’s The Difference?
Wondering what the difference is between EIDL and PPP loans? Or need help deciding which (or both) type of SBA coronavirus loan your business should apply for? Read on to compare/contrast these two different Small Business Administration loans for small business coronavirus relief and decide which is better for your needs so you can apply for it.
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EIDL VS PPP Loans: Quick Overview
The Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP) are two different programs funded by the CARES ACT, which includes stimulus funds in the form of loans and grants for America’s small businesses. The two loans share a lot of similarities but also have some important differences.
The EIDL is a loan of up to $2 million (depending on how much you’re approved for) meant to help businesses cover 6 months of operational expenses. You do have the pay the money back, eventually. However, EIDL loans also include a $1,000 to $10,000 cash advance which do not have to repay—even if you are ultimately rejected for the EIDL loan.
PPP loans can also be used for operational expenses, but their main purpose is to cover 8 weeks of payroll; you need to spend at least 75% of the loan on payroll expenses. You can also use a portion of the loan to cover mortgage, rent, or utility expenses. PPP loans can be as large as $10 million (depending on your payroll expenses) and will be forgiven as long as you follow the all the rules (more on that in a bit).
You can apply for and receive both loans as long as you meet the qualifications for both loans and use the loan proceeds on different things. For example, you can use the PPP for payroll and the EIDL to cover other operational expenses.
How Economic Injury Disaster Loans Work
An EIDL loan can be used on payroll costs, employee benefits, fixed debts such as mortgages, rents, or leases, accounts payable, and other bills. If you receive the forgivable grant, you need to spend it on those same expenses within 8 weeks of receiving the grant—i.e, in the amount of time it will likely take before the main loan comes through.
Also called “Working Capital Disaster Loans” EIDL funds are issued directly from the US Treasury and you can apply right on the SBA’s website.
How Much Can I Borrow?
You can borrow up to $2 million, depending on the extent of your economic injury as determined by the SBA. The SBA will determine how much you need based largely on the information you supply about your business—including your business’ gross revenue and cost of goods sold over the last 12 months.
Additionally, you can request an emergency EIDL grant that you do not have to repay. This grant cannot exceed $10,000 or $1,000 per employee. You will receive this much sooner than the bulk of the loan—as soon as a few days of successfully submitting an application, according to the SBA. (In practice, however, businesses report much longer wait times on their EIDL advances.)
What Is The Loan Term Length?
Loan term lengths can be as long as 30 years. You are able to defer your first payment on the loan for up to a year.
What Are The Rates & Fees?
Interest rates for EIDL loans are 3.75% for businesses and 2.75% for nonprofits. No other rates or fees apply, and there is no prepayment penalty.
EIDL loans less than $25,000 do not require collateral and loans less than $200,000 do not require a personal guarantee.
Is The Loan Forgivable?
The EIDL loan itself is not forgivable, unless you later roll it into a PPP loan, a portion of which may be forgivable. If you receive the EIDL advance/grant, this amount is forgivable as long as you spend it on operating expenses as specified by the SBA.
Am I Qualified?
Most small businesses are eligible for an EIDL loan. The main requirement is that you have 500 or fewer employees. You also need to have been in business since January 31, 2020. Here are a few more things to know about EIDL eligibility:
- Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.
- Businesses cannot be engaged in illegal activities as defined by federal guidelines or lobbying.
- Business owners cannot be more than 60 days behind on child support.
- Your business cannot be a strip club, casino, or farm.
- Business owners cannot be currently incarcerated; on parole or probation; subject to any current criminal charges or proceedings; pled guilty to a felony or been placed on parole or probation for a felony within the past five years.
- You can’t be delinquent on any other SBA loans.
Generally, you will also need at least decent credit to be approved for an EIDL loan.
How Paycheck Protection Program Loans Work
PPP loans can be used to cover payroll costs, as well as most mortgage interest, rent, and utility costs over the 8-week period after the loan is made. It can also be used for paid sick leave and employee benefits (which fall under the category of payroll costs). The loan is forgivable as long as you maintain your payroll. The main difference between a PPP loan and an EIDL is that you have to spend at least 75% of the PPP loan on payroll expenses.
Also, unlike EIDL loans, PPP loans are not issued directly from the US Treasury. Rather, the funds are issued through an SBA-approved lender (bank or other financial institution) and you apply through this lender rather than through the SBA directly.
How Much Can I Borrow?
You can borrow up to $10 million, depending on your payroll expenses. Loan amounts 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 $100,000 annualized for each employee.
What Is The Loan Term Length?
The term length is 2 years, and you can defer your first payment for 6 months.
What Are The Rates & Fees?
For any portion of the loan that is not forgiven, your interest rate will be 1%. No collateral or personal guarantee is required.
Is The Loan Forgivable?
The loan is forgivable if you use the loan proceeds as specified—for payroll, rent, and utilities, over an 8 week period—and if you maintain your staff and payroll. If you have to reduce your staff or compensation, you will owe on the loan.
However, PPP loan forgiveness is not all-or-nothing. Many businesses that are not able to maintain payroll (despite their best intentions) will have to repay a portion of their PPP loan but not the whole thing.
Here’s what the US Treasury Department PPP fact sheet says about PPP loan forgiveness:
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
To request loan forgiveness, you need to submit a request to the lender servicing the loan and include documents verifying your employee statuses and pay rates, as well as mortgage/rent and utility payments. The lender will then make a decision on forgiveness within 60 days.
Am I Qualified?
Here’s what you need to qualify for a PPP loan:
- Fewer Than 500 Employees. Note that independent contractors and freelancers do not count as employees. You cannot include independent contractors and freelancers in your employee count when applying for a PPP loan. Self-employed individuals have a separate PPP loan application process.
- In business since February 15, 2020.
- Able to demonstrate the economic impact of COVID-19.
The same EIDL restrictions regarding applicants with recent criminal histories and applicants belonging to certain industries also apply to PPP applicants.
In addition to the above, you can consult with your participating SBA lender to find out that lender’s specific requirements for PPP loans, as these requirements may vary somewhat from one lender to the next. PayPal and Square have also both recently announced they have been approved to issue PPP loans, so you may be able to apply through those companies’ respective websites (you may need to set up a Square or PayPal account if you don’t have one already).
Can I Apply For Both?
The short answer is yes, you can apply for both loans, provided you meet the eligibility requirements for both loans. So should you? Just keep in mind the following:
- There are different application processes and documentation requirements for each loan.
- EIDL loans are not forgivable, apart from the EIDL advance, unless you are able to successfully roll it over into your PPP loan (and even if you do that, it’s possible that not all of the loan will be forgiven).
- EIDL has a higher interest rate than PPP (3.75% vs. 1%).
- You cannot use an EIDL for the same purpose as a PPP loan (payroll in the 2 months after receiving the loan). However, you can use the EIDL for payroll once you’ve exhausted the PPP after those two months have passed.
- If your business receives both loans, or refinances an EIDL into a PPP loan, the EIDL grant amount will be subtracted from the amount forgiven in the PPP loan.
Taking all this into account, you should only also apply for the EIDL if you need it on top of the PPP, and are OK with starting to repay the loan after a year.
Which Is Best For My Financing Needs?
Read the following to determine which type of SBA loan is best for your business’s financing needs.
Apply For An EIDL Loan If…
- You need help paying your operating expenses (payroll, mortgage, rent, utilities) due to COVID-related business losses.
- You understand you must repay the loan (aside from the grant portion).
- You’re not sure if you’ll be able to maintain your business’s payroll under current conditions (even if you receive the loan).
- You have significant operating expenses apart from payroll.
Apply For A PPP Loan If…
- You need help covering your payroll over the next 8 weeks due to COVID-19-related business downturn.
- With financial help to cover 8 weeks of payroll, you expect to be able to maintain most or all of your full-time staff.
- You understand you can only spend up to 25% of the loan on non-payroll expenses.
- You understand you will have to repay some of the loan if you don’t maintain your payroll.
Apply For Both If…
- You need help paying BOTH payroll and other operating expenses (rent, utilities, mortgage, etc.) due to COVID-19-related business losses.
- You understand you may have to repay loan proceeds spent on non-payroll expenses (with interest).
- You understand the forgivable EIDL grant is subtracted from the forgivable portion of the PPP loan (i.e., you don’t get the EIDL grant if you also get a PPP loan)
Where To Apply For EIDL & PPP Loans
The EIDL and PPP program have different applications and application processes. Below, you can find out where to apply for each loan.
For An EIDL Loan
You can apply for an EIDL loan right from the SBA’s website. Find the application here: EIDL Loan Application
Note: If you’re calling the SBA’s 1-800-659-2955 number to check on the status of your EIDL application, make sure to ask for the Tier 2 option, as this pertains specifically to the COVID-19 program. If checking your EIDL status online, you need to find the SBA Assistant at https://disasterloanassistance.sba.gov/s
For A PPP Loan
You can apply for a PPP loan through any participating SBA lender. You cannot apply for a PPP loan directly through the SBA. If you have a business relationship with a bank or credit union, contact them to find out if they are participating in the program.
More SBA Resources For Small Businesses Affected By COVID-19
At Merchant Maverick, we are closely following the news and government resources available to aid small businesses. As follows are some further resources we’ve put together regarding EIDL, PPP, and other SBA programs for small businesses affected by COVID-19:
- How SBA Economic Injury Disaster Loan (EIDL) Emergency Advances Work & Where Your Small Business Can Get One
- SBA Paycheck Protection Program (PPP) Loans Explained: How They Work, Who Qualifies, & Where To Apply
- Applications For Contractor & Freelancer PPP Loans Are Open: Here’s What The Self-Employed Should Know
- When Will My Paycheck Protection Program Loan Be Funded?
- Your COVID-Affected Small Business Might Be Eligible For SBA Loan Debt Relief Via The CARES Act
- How The CARES Act Coronavirus Stimulus Package Could Help Your Small Business & Employees
- The Best SBA Lenders For Small Businesses (& How To Choose The Right Lender For Your Needs)
In addition to the above, you can find even more resources in our dedicated Coronavirus (COVID-19) business hub, which we update daily.