PPP, EIDL, Both? Choosing the Right COVID-19 Business Loan(s)
You’ve got options when it comes to government financial aid for your pandemic-impacted business. But which one is right for you will depend on your needs and business model.
Here we’ll discuss the federal government’s Payroll Protection Program (PPP) and the Small Business Administration’s (SBA) Economic Injury Disaster Loan (EIDL).
Compare the Pros and Cons
|Maximum loan amount||$10 million||$2 million|
|Forgivable||Yes||$10,000 of it (advance grant)|
|Collateral required||No||Depends on the amount of loan|
|Loan terms||1%, 2 years||3.75%, up to 30 years
(2.75% for non-profits)
|1st payment deferral||6 months||12 months|
|Approved uses||Payroll expenses
Fixed debts (e.g. rent, utilities)
Some bills that could have been paid if the disaster hadn’t occurred
|Where to apply||Approved lender||SBA website|
Can You Apply for Both Loans?
Yes, most businesses can — and probably should —so that each covers what the other one doesn’t. Just remember that:
- You can’t use funds from both loans for the same purpose, such as payroll costs
- The EIDL grant can’t be added on top of the PPP forgiveness amount; on the contrary, it will be subtracted
Who Can’t/Shouldn’t Get a PPP Loan
The business is not qualified if it doesn’t have any employees and the business owners pay themselves through compensation types that are not taxed as wages.
Compensation types not taxed as wages (DON’T qualified for PPP):
- Owner draws
- Member distributions
Compensation types taxed as wages (DO qualify for PPP):
- Net profit from sole proprietorships, single-member or partnership LLCs
- Payroll expenses for corporations
Businesses that primarily use 1099 contractors won’t benefit much from a PPP loan, since whatever they pay these workers don’t count in figuring payroll costs (independent contractors can apply for a PPP on their behalf). At least 75% of the PPP must be used for payroll for the loan to be forgiven, so if that payroll figure is low, so will be the loan amount.
Also, you can’t receive unemployment benefits at the same time you’re using a PPP loan. A good workaround is to use the PPP for its 8-week life, then apply for unemployment.
Who Can’t/Shouldn’t Get an EIDL
There certainly are fewer restrictions on how you can spend the EIDL than there are for a PPP loan. However, there are some ineligible uses, and if they are what you wanted a loan for, the EIDL is not right for you. These expenses include:
- Dividends and bonuses
- Owner disbursements
- Stockholder/principal loan repayment
- Long term debt refinancing
- Facilities expansion, fixed asset acquisitions
- Physical damages repair or replacement
Also, you won’t be eligible for an EIDL if you are delinquent on:
- Existing SBA loans
- Loans from another federal agency
- Payment of any part of a direct federal debt except IRS obligations
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