Comparison of SBA Loan Programs: COVID-19 Economic Injury Disaster Loan vs. Paycheck Protection Program

cash flow covid-19 Mar 30, 2020

**This article was last updated on April 5, 2020. Since details are changing on a daily basis, I'm doing my best to keep this as updated as possible.**

Since The CARES Act has passed both the House and Senate, it's a good time to dig into the details of the type of support small business owners have available to them to weather the COVID-19 pandemic.

It's no doubt that this is an unprecedented time for small business ownership. While it can be a great time to hone processes and improve efficiencies, the first priority is staying in business and that means having adequate cash.

The Small Business Administration has created a few different outlets for helping small businesses with their cash flow. This post will break down the difference between the COVID-19 Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program. I'll also link some good resources at the end of this post for more information.

 

COVID-19 Economic Injury Disaster Loan (EIDL)

General Details:

Small businesses can receive up to $2 million in loan disbursements to handle fixed operating costs. The loans have an interest rate of 3.75% for small businesses and 2.75% for non-profits. 

 The loans have long-term repayments (of up to 30 years) so that the payments can remain affordable. Additionally, there is an 12 month deferral on the loan payment, so no payments will be due until 12 months after loan issuance.

Additionally, there is a $10,000 advance for the EIDL loan which does not have to be repaid. 

How much should you apply for?

The SBA is determining the loan amount that businesses will receive. You will be able to request additional funding. 

For the initial application, the only financial information requested is gross revenues and cost of goods sold for the past 12 months (ended January 31, 2019). Additional information will be requested by the SBA during the loan approval process.

Who is eligible?

Any small business that is being economically impacted by COVID-19. This includes corporations, LLCs, sole proprietors, freelancers, contractors. Basically if you've filed some form of a business tax return (Schedule C, 1120S, etc.) you qualify.

How do you apply?

You apply for this loan through the SBA website at the link here

 

Paycheck Protection Program

General Details:

The Paycheck Protection Program is administered under the SBA 7(a) lending program and its purpose is to help small businesses with their near-term expenses and to assist in keeping employees employed.

 You can borrow up to 2.5 times your average monthly payroll cost from the prior 12 months. You'll also be eligible to have the loan forgiven up to the amount spent on covered expenses during the 8 weeks following the loan origination. Covered expenses include costs such as payroll, health insurance, rent, and utilities.

The interest rate on these loans is 1% for the portion not forgiven and loan payments are deferred at least 6 months. The term of these loans is 2 years.  

How much should you apply for?

2.5x your average monthly payroll for the prior 12 months. This is capped at $10 million.

Who is eligible?

Any small business that is being economically impacted by COVID-19. This includes corporations, LLCs, sole proprietors, freelancers, contractors. Basically if you've filed some form of a business tax return (Schedule C, 1120S, etc.) you qualify. You must have been in business on February 15, 2020 to qualify.

How do you apply?

The SBA has partnered with local banks to administer the loans. Check with your business bank or search for a lender here

 

Differences Between the Two SBA Loan Programs

Loan Forgiveness

The COVID-19 EIDL is a longer-term cash flow solution to help small businesses weather the storm. It does not have the loan forgiveness component that the Paycheck Protection Program has. The EIDL does have a $10,000 advance that does not have to be repaid. 

Funding Limits

Since the Paycheck Protection Program is currently designed to help businesses with cash flow and keeping employees employed in the short term, the funding limits are lower than that of the COVID-19 EIDL. The Paycheck Protection Program is simply 2.5x average monthly payroll.

Lending Institution

The COVID-19 EIDL application is handled through the SBA whereas the Paycheck Protection Program application is handled through local banks.

Disbursement Timeline

Since the COVID-19 EIDL application is handled through the SBA, it will take longer to receive funds than applications for the Paycheck Protection Program through local banks. The COVID-19 EIDL does have a loan advance component to help businesses receive up to $10,000 while the loan closes (which does not have to be repaid). 

 

Helpful Links for More Information

 

Be Wary of Scams

With the amount of capital that the government has made available to small businesses, it is important to be wary of those that will be opportunistic or scam your business out of the funds given to you. If you apply for a loan, make sure you are applying through an approved lending institution. Ensure you know who you're speaking with before you give out secure information.

Additionally, if you are getting help from a professional to prepare documentation for loan application, make sure they are charging you a fair price for the work to be completed.

If you have questions about the SBA loan programs or what information is needed to apply, don't hesitate to send me an e-mail at info@cultivatedstrategy.com or fill out the form below.

 

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