While 2020 started off strong, the impact of the coronavirus pandemic has hit businesses hard. In light of these trying times, the US federal government passed the CARES Act, which includes two loan programs.
The Paycheck Protection Program (PPP) helps with ensuring businesses can meet their payroll requirements, including paying themselves as independent contractors. If used correctly, the loan is forgivable. The Economic Injury Disaster Loan Program (EIDL) allows businesses to receive a $10,000 grant that they do not have to be repaid.
To be eligible for these loans for small businesses, you must have 500 employees or less whose primary place of residence is the United States. Sole proprietors and independent contractors are also eligible for the program.
Qualifying businesses can use these two federal options alone or in conjunction with one another. The only caveat is, you cannot use them both to make payroll, but we’ll explain that in more detail below. Here’s a look at each of these loans and how businesses can use them individually or simultaneously.
Paycheck Protection Program (PPP)
Your business can apply for PPP based on your 2019 average monthly payroll, including salary, health benefits, sick leave, parental leave, family leave, medical leave, vacation time, etc. To cover eight weeks of your payroll, you can apply for up to 2.5 times your 2019 average monthly payroll.
No credit check is required for this loan, and you can defer payment for six months. Your business can apply for up to $10 million to cover payroll expenses. To receive PPP, apply directly through an approved lender. To help you prepare, here is a sample borrower application form.
When comparing PPP and EIDL, you’ll find that PPP is much more limiting as to its usage. Businesses must use at least 75 percent of the loan to cover payroll and employee benefits. Any money left over after that can only be used to pay necessary expenses, including rent, mortgage interest payments, and utilities.
During the application process, you’ll be required to certify that you are using the funds to meet your payroll and employee benefit commitments with at least 75 percent of the funds.
Businesses that use the money disproportionately (25 percent on payroll and 75 percent on expenses) will have to pay 1 percent interest on the funds that were improperly allocated. And if you use the money in any other manner, the government could charge you with fraud.
PPP loan forgiveness
If your business takes the proper steps and precautions concerning the use of the loan and documentation, you can qualify for full loan forgiveness. The criteria for loan forgiveness include:
- You use the funds for exactly eight weeks: From the date of your first payment from your lender, you should only use the funds to cover your payroll and eligible business expenses for eight weeks.
- At least 75 percent of your loan goes toward payroll: As explained above, you must use 75 percent of the loan on payroll expenses. If you still have funds remaining after that, it can go toward eligible rent, mortgage, or utility payments.
- You maintain your number of employees: if you do not maintain your headcount, your portion of the loan that is forgivable will be reduced by the same percentage as the number of employees you let go.
- Continue paying staff at least 75 percent of their salary: Every employee must receive at least eight weeks of 75 percent or more of their salary based on their total salary from the previous quarter.
- Rehiring/increasing salary grace period: You have until June 30th to rehire employees to maintain your staff numbers and to reinstate their pay to meet the 75 percent requirement so that you are eligible for loan forgiveness.
To prove your eligibility for loan forgiveness, you’ll need to have payroll reports and tax filing documentation. Additionally, you’ll need to verify your income and any unemployment insurance payments. Also, ensure that you’re documenting your expenses related to retirement contributions and health insurance expenses.
Once you have exhausted the use of the funds during the eight-week period, you can apply for loan forgiveness. When your lender receives your application for loan forgiveness, it must respond to your request within 60 days.
If your lender denies your request for loan forgiveness, you’ll start accruing 1 percent interest on the 2-year loan. However, you can pay off the loan in its entirety at any point without paying additional fees or interest.
Economic Injury Disaster Loan Program (EIDL)
The Economic Injury Disaster Loan Program (EIDL) allows you to apply for up to $2 million to cover fixed debts. Fixed debts include rent, utilities, payroll, accounts payable, and bills that your business would have been able to pay if the pandemic had not caused such a disruption.
Unlike PPP, the loan is not forgivable; however, it does include a $10,000 grant that you do not have to pay back. Plus, you can defer payments for 12 months. The loan terms are 30 years at 3.75 percent interest (however, nonprofits receive 2.75 percent interest terms).
You must undergo a credit check to be eligible, and you cannot be delinquent on any SBA loans or other federal loans. To receive an EIDL loan, you must apply through the SBA website.
What you need to know about applying for both PPP and EIDL
If you’re applying for EIDL and PPP, ensure that you do not use your EIDL funds to meet payroll obligations. Additionally, the $10,000 grant that you receive as part of EIDL will be deducted from your PPP loan forgiveness, if you choose to apply for forgiveness.
Businesses that get an EIDL to use for payroll expenses and later apply for a PPP can use the PPP funds to refinance the EIDL. However, if you did not use the EIDL for payroll expenses, you could not refinance that loan with PPP.
Both loans require diligent and complete bookkeeping. Business owners should be careful about applying for such loans with input and expertise from an accountant that is well-versed in small business finance.