Economic Injury Disaster (EIDL) Loans VS Paycheck Protection Program (PPP) Loans: What’s The Difference?

Wondering what the difference is between Economic Injury Disaster Loans (EIDL) and Paycheck Protection Program (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.

EIDL VS PPP Loans: What’s The Difference?

Businesses affected by COVID can apply for loans through the EIDL and PPP programs, which were funded by the CARES Act in 2020 until the funds ran out in August. The $900 billion stimulus package passed in late December revives and restructures a number of COVID-related relief programs, including PPP.

EIDLs can reach $2 million. While the main part of the EIDL has to be repaid, the $10,000 EIDL advance is automatically forgiven. PPP loans can reach up to $10 million and are 100% forgivable if the borrower follows loan forgiveness rules laid out by the SBA.

The EIDL is meant to help businesses cover six months of operational expenses. You do have the pay the money back, eventually. You can, however, also apply for an EIDL grant through the EIDL program. This grant doesn’t have to be paid back and award up to $1,000 per employee, up to a maximum of $10,000.

PPP loans can also be used for operational expenses, but their primary purpose is to cover eight weeks of payroll. To qualify for forgiveness, you must spend at least 60% of the loan on payroll expenses. You can also use a portion of the loan to cover mortgage, rent, or utility expenses. As of 2021, the remaining 40% of the funds can additionally be used to cover necessary software expenses, property damage from civic unrest, necessary supplier costs, and worker protection expenses like personal protective gear and barriers. The amount you can borrow depends on your payroll expenses.

You can apply for and receive loans from both the EIDL and PPP programs as long as you meet the qualifications for both loans and use the loan proceeds differently. For example, you can use the PPP for payroll and the EIDL to cover other operational expenses. Previously any money you received through an EIDL grant was deducted from the amount of your PPP loan that would be forgiven. That’s no longer the case, making it possible to apply for both an EIDL grant and PPP loan without penalty.

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 eight weeks of receiving the grant — i.e., in the amount of time that 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 after successfully applying, 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 can 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 or casino
• 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.

Note that the deadline for applying for an EIDL loan for COVID-19 has been extended to Dec 31, 2021.

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 24-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 60% of the PPP loan on payroll expenses.

Also, unlike EIDL loans, PPP loans are not issued directly from the US Treasury. Instead, 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.

With the renewal of the PPP program and SBA guidance released on January 6, 2021, the PPP program now allows for businesses to draw on PPP funds a second time provided they meet a new, more stringent set of guidelines. There are now slightly different rules governing businesses that are drawing upon PPP for the first time versus businesses that are making a second draw.

How Much Can I Borrow?

First Draw

The maximum amount you can borrow is equal to 2.5x your monthly payroll or $10 million, whichever is lower.

Second Draw

The maximum amount you can borrow is equal to 2.5x your monthly payroll or $2 million, whichever is lower. Businesses in the accommodation or food service industries may borrow up to 3.5x their monthly payroll or $2 million, whichever is lower.

What Is The Loan Term Length?

The term length is two years, and you can defer your first payment for six 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 a 24-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.

The passage of the Paycheck Protection Flexibility Act offers additional guidance:

• Re-Hiring: You have 24 weeks (not to extend beyond December 31, 2020) to restore your full-time employment and salary levels.

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.

First Draw:

• You have 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.
• You’ve been in business since February 15, 2020 or you’re a seasonal business that was in operation for any 12-week period between February 15, 2019 and February 15, 2020.
• You’re able to demonstrate the economic impact of COVID-19.

Second Draw:

• You have fewer than 300 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.
• You’ve been in business since February 15, 2020 or you’re a seasonal business that was in operation for any 12-week period between February 15, 2019 and February 15, 2020.
• You have utilized all funds you received from your first draw.
• You are not a publicly-traded company.
• You must show a 25% or greater reduction in revenue comparing any quarter in 2019 to the same quarter in 2020.

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 can 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 two 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 you 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 24 weeks due to COVID-19-related business downturn
• With financial assistance to cover eight 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 40% of the loan on non-payroll expenses
• You understand you will have to repay some of the loan’s amount 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. You can fill out PPP applications from the SBA and give them directly to your lender.

Through the SBA, here is the application for first-time borrowers: PPP Application First Time Borrowers.

If you are applying for a second draw, the application is here: PPP Application Second Draw Borrower Application.

Here is our list of preferred SBA lenders, and here is the downloadable PPP application form, which you’ll submit with the help of your lender.

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
• Round 2 PPP Loans Explained: Rules, Requirements, & Where To Apply
• 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
• 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.