Comparison and use of two SBA programs developed to support businesses during the Coronavirus Pandemic.
Last Updated March 30, 2020
There are two SBA loan programs authorized to assist small businesses in dealing with the impact of the pandemic: The Economic Injury Disaster Loan Program (EIDL) and the Payroll Protection Program which is part of the CARES Act.
Both programs are available to small businesses defined as those having up to 500 employees.
|Funds available||Up to $2 million||
Up to $10 million
(formula based on 250% of comparable prior year payroll costs
|Lender||SBA direct||Bank with 100% SBA guarantee|
|When available||Now||April 3, 2020|
|Purpose of loan||Pay fixed debts, payroll, accounts payable, & other obligations that cannot be paid due to the Coronavirus business interruption.||Payroll costs, costs of group benefits mortgage interest, rent, utilities, interest on debt incurred prior to 2-15-2020. EIDL loans can be Refinanced under PPP|
|Term||Up to 30 years||Up to 10 years|
|Interest rate||3.75% fixed||Not to exceed 4%|
|Loan deferral||None||Complete payment deferral relief for 6 to 12 months|
|Loan forgiveness||No but $10,000 emergency grant available||Portion of loan used to fund the following costs incurred for the eight-week period following loan origination: Payroll costs, mortgage interest, rent & utilities. Forgiveness reduced for layoffs, etc. Forgiveness is not taxable income for Federal Income Tax purposes|
|Underwriting criteria||Credit score or other applicable method||Business was operating on 2-15-2020 and business paid employees or independent contractors|
|Emergency Advances||Yes, up to $10,000||No|
|Collateral||Required if over $25,000||No|
|Personal Guarantee||Yes if over $200,000||No|
There are some exceptions provided in the CARES Act (PPP Program) that provide eligibility to borrowers with over 500 employees, particularly in the hospitality and food service industries. Those exceptions are not covered in this document.
Choosing the better of these two programs for your business:
For businesses with no reserves, particularly “non-essential” businesses that are virtually shut down and who expect the Coronavirus Pandemic to interrupt business for a quarter or longer, the EIDL may be the best bet. The use of the funds is not as limited as the PPP. This program is designed around a typical FEMA type disaster such as a hurricane, tornado, fire or flood where the enterprise is virtually out of business for a period of time. A good example would be a restaurant or a produce supplier whose customers are all restaurants. In these cases, employees must be let go for the duration of the business interruption. Since the loan term can be up to 30 years at a low fixed rate, it acts like “Quaisi-Capital” for the business…..like a loan from a family member.
For businesses who wish to retain or improve their team and have either sufficient reserves and/or continuing revenues during the pandemic, the PPP program is likely the better fit. Essentially through the loan forgiveness, the government is covering most of your payroll, rent or mortgage interest and utilities for a period of eight weeks.
EIDL loans can be applied for online with the SBA. At times, the website has been down over the past two weeks….“closed for maintenance”.
PPP loans will be administered through the banking system. Not all banks are SBA approved lenders and some banks may not choose to participate. Best practice would be to start with your existing bank.
If you need a referral to an SBA approved lender, please contact our office. Even though our office is closed, we are fully functioning albeit with minimal personal contact. We are willing and able to assist you!
Also, this document is digested from over 800 pages of legislation. There are exceptions, special rules, etc. Also, as with all “rushed legislation” the details have to be sorted out. We are keeping up on this and can assist you if you want to pursue one of these two programs.
On March 31, 2020, the Department of Treasury released the Paycheck Protection application and supplement information. The application and accompanying borrower guide are available on their website. Applications can be submitted for the PPP Loan starting Friday April 3, 2020.
Events like this pandemic provide challenges and opportunities. As the economy recovers after this has passed, there will likely be many new opportunities. Some of your competitors may close their doors forever. Some markets will be disrupted and will change. If we can assist you in any way, as we power through this, please let us know.
The Senate committee on Small Business and Entrepreneurship prepared a nice guide on the CARES act. See this pdf document prepared by the U.S. Senate Committee on Small Business and Entrepreneurship with this Link: The Small Business Owner’s Guide to the CARES Act