On April 7, 2020, Paul McEwan, CPA, MTax, AIFA and principal at Rea & Associates, joined us to answer questions about SBA Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP).
ERISAfire COVID-19 Town Hall Recording - Week 3
April 7, 2020
CARES Act SBA Loan Programs
What loan programs did the CARES Act establish for small and medium-sized businesses (SMBs)?
There are two loan programs, and it's important to keep them straight:
- EIDL - an expansion of the existing Economic Injury Disaster Loan Program (EIDL) that includes a forgivable advance of up to $10,000 for just applying (not actually being awarded a loan)
- PPP - an entirely new program that provides forgivable loans to SMBs for the purpose of providing liquidity to cover payroll expenses over the short term, the amount of which is equal to 2.5 times one month's worth of payroll expenses
Demand for PPP loans has been extremely high, and it's likely that there are enough applications in the queue submitted by banks to the SBA to exhaust the funds.
With regard to the EIDL forgivable advance (grant) of $10,000, SBA has started alerting employers who indicated interest in the EIDL grant that it will be rationed based on the number of employees—$1,000 per employee, up to the $10,000 established by the CARES Act.
What businesses are eligible to apply for an EIDL and/or PPP loan?
Organizations of nearly any type with fewer than 500 employees can apply: for-profit businesses, cooperatives, ESOPs, sole proprietors and most private nonprofits. SBA will count affiliated organizations together, but for PPP loans the CARES Act created an exception for the restaurant and hospitality industries. Organizations in those industries still must themselves have fewer than 500 employees, but the affiliation rules are waived.
How much can a business borrow?
The amount of an EIDL is determined by SBA based on documented economic losses and is limited to $2 million.
The loan limit for a PPP loan is 2.5 times one month's worth of payroll (using a rather complicated look-back calculation), up to $11 million.
Can I apply for both?
Yes. Just understand that borrowers cannot use CARES Act loan funds from different loans for the same exact purpose. In other words, if you use your EIDL funds for the May 31 payroll run, you can't also use the PPP funds for that same payroll run. Because EIDLs are for expenses paid up through December 31, 2020, and PPP loans are only for the 8 weeks following funding of the loan, you should generally use PPP loan proceeds first, and then EIDL funds after that.
Also, if an employer received an EIDL grant (a forgivable advance of up to $10,000 just for applying), the amount of that grant will be subtracted from the maximum amount that can be forgiven under its PPP loan.
How does an employer obtain a PPP loan?
PPP loans are provided through banks, not directly from SBA. Here are some resources from AICPA to help employers prepare their PPP application. Keep in mind that the banks make the judgment call, just like any other loan, so no matter what you read on anyone's website or hear on a webinar, the loan application requirements of the bank you are submitting your application to will control.
- SBA template loan application
- Sample loan amount calculator from the American Institute of CPAs (intended for a non-seasonal business that has been in operation throughout 2019)
When should an employer apply for a PPP loan?
The program received its second round of funding after the initial $350 billion earmarked for it was quickly depleted.
Apply for your PPP loan now, before the program runs out of funds (again).
What can CARES Act loan funds be used for?
EIDL proceeds can be used for any business-related obligation that was directly impacted by the COVID-19 pandemic through December 31, 2020.
PPP loan proceeds are more limited and can only be used for payroll costs, interest on mortgages, rent, and utilities for the 8 weeks following funding of the loan.
What are the repayment and forgiveness terms?
EIDLs carry an interest rate of 3.75% (2.75% for nonprofits) and up to a thirty (30) year term. If SBA makes an advance on the loan, it will not need to be repaid even if the business is ultimately denied a loan. EIDL repayments can be deferred for up to a year.
PPP loans are designed to be forgiven and carry an interest rate of only 1%. If used for one of the approved purposes and at least 75% of the loan proceeds are used for the purposes of keeping employees on the payroll for at least eight (8) weeks, then the entire amount of the loan can be forgiven. Be mindful that the amount of PPP forgiveness is reduced if headcount is reduced or an employee's pay is cut back too much. SBA is still working out the exact details of how this reduction in PPP loan forgiveness will work. Loan payments are deferred for six (6) months.