Today, we’re going to examine some of the key differences between PPP vs EIDL. Each business loan has its benefits and weaknesses that you’ll need to be aware of before applying. Which one is right for you? Read on to find out.
Affected by COVID?
Nearly everyone has been affected by COVID to some extent. But perhaps no one was hit harder than small business owners. In the wake of the pandemic, more people are looking for easy ways to get loans and financial assistance. In these trying times, it’s important to continue providing for your customers. But you need help to do it.
Fortunately, you have options available to you to help you get back on your feet. Thanks to the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL), you can get financial assistance in times of economic challenges.
But which loan is the better option for you and your business? To answer that, we need to break down each loan so you can see the big picture. On another note, If you want your small business to grow, setting up a business bank account should be one of the initial steps. Bare in mind that lenders will look over your business bank account when reviewing options for funding or deciding whether or not to give you a loan (see best accounting tools for small business).
PPP vs EIDL: The Differences
Paycheck Protection Program loans are unique in that they are 100% forgivable, meaning you don’t have to pay back what you borrow as long as you use the money loaned to you for approved expenses. Borrowers of PPP loans can receive as much as $10 million if they qualify.
You can certainly use PPP loans for things like operating expenses, but they are really meant to act as a payroll advance that covers you for 2 months. If you wish to qualify for repayment forgiveness, you will have to use a minimum of 60% of the loan on payroll expenses.
This means that business owners must agree to use the majority of the PPP loan to pay their employees. The remaining portion of the loan can then be used on things such as rent, mortgage payments, and so on.
How much money you receive in the PPP loan is contingent on the typical amount that you pay in payroll expenses. It is certainly possible for you to use the PPP loan for other expenses while spending less than 60% on payroll expenses.
You will, however, need to repay your PPP loan if you decide to do this. Depending on your financial situation, you may have no other recourse but to use more of your PPP loan for expenses other than payroll and make repayments.
Excluding freelancers and independent contractors, your business must have fewer than 500 employees to be eligible for a PPP loan. Your business must also have been open since February 15, 2020, and you must be able to show how the pandemic has affected your livelihood.
Economic Injury Disaster Loans provide a smaller amount of financial assistance, topping off at $2 million. Unlike PPP loans, you will have to agree to pay back the entire amount of the EID loan that you borrow.
EID loans are designed to provide financial support to businesses that need help covering operating costs. The great thing about this loan is that it covers 6 months of operating costs, giving business owners some relief during difficult times.
What’s more, business owners can receive anywhere between $1,000 and $10,000 in the form of a cash advance to help out even more. These advances do not need to be paid back, and that’s even if you get denied for the loan.
To qualify for an EID loan, your business will need to have been open since January 31, 2020, and you must have fewer than 500 employees. There are some other prerequisites, such as your business cannot be a farm, casino, or adult club, and business owners cannot be behind on child support (if applicable).
If you have taken out SBA loans in the past, you must not be behind on any repayments to qualify for an EID loan. Your personal credit score should also be in good standing, although some exceptions may be made in regards to this.
For both PPP and EID loans, business owners must be in good standing with the law. This means you can’t currently be incarcerated or be on probation or parole. If you have pled guilty to a felony or placed on probation or parole in the last 5 years, you will be disqualified from receiving a PPP or EID loan.
How to Use Your Loan
As a small business owner, you have a lot of versatility in how you go about using your Economic Injury Disaster Loan. Not only are they ideal for covering payroll expenses, but you can use these loans to pay employee benefits, mortgages, cover accounts payable costs, rent, and other bills related to your business.
With PPP loans, you may use your financial assistance to take care of payroll costs. But mortgage, utility bills, and rent may be paid with it, as well. Just remember that you will want to use at least 60% of your loan for it to be forgivable.
Eligibility for PPP Loan Forgiveness
You can get loans from both the Economic Injury Disaster and Paycheck Protection Programs. However, you will need to meet the qualifications that these loans require and use each of the funds differently, such as using the EID loan on your business’s operating costs while using the PPP loan to cover payroll expenses.
In order to be eligible for PPP loan forgiveness, you will have to spend at least 60% of the total amount of the loan on payroll expenses in a period of 2 months. This starts from the time that you receive your PPP loan.
How Much Should You Borrow?
You will first need to learn how much you are allowed to borrow. This is determined by the Small Business Administration (SBA). The amount that they decide you are eligible to receive is based on the data about your business that you provide.
This data consists of things like how much your business grosses in revenue, as well as your costs of goods sold (COGS). These figures will need to be from the last 12 months from the time you apply for a loan.
If you wish to receive a cash advance from an EIDL grant, you will need to request emergency assistance. This is the grant outlined above that is between $1,000 and $10,000. You cannot get more than $10,000, or $1,000 for each employee on your payroll.
Again, this grant doesn’t need to be paid back. It’s worth noting, too, that these grants typically arrive much sooner compared to the rest of the loan. Some small business owners have received their emergency grants in just a few days after applying, but this isn’t necessarily typical. Lastly, there is also a number of small business grants for women entrepreneurs who need business funding in cities across the nation.
Getting financial assistance is great, but how long do you have to pay it back? If you’re like most small business owners affected by the pandemic, you aren’t likely to be in a position where you can start paying back your loan right away.
This was considered in the CARES Act (where funding for the loans comes from) and gives business owners some breathing room. For EID loans, you can choose to make repayments for as much as 30 years. What’s more, you may defer making your first payment for up to a year.
With PPP loans, the loan term length is much shorter at just 2 years. If need be, you don’t have to make your first repayment for 6 months.
EIDL interest rates vary between businesses and non-profit organizations. For businesses, the interest rate is 3.75%, while the rate for non-profits is 2.75%. You also don’t have to worry about being penalized if you pay back your loan in full early.
For PPP loans, things are a bit different. Remember, you can use your financial assistance in a way that ensures your loan will be forgiven. If you choose to do so, you won’t have any interest rate and therefore won’t have to repay anything.
If, however, you don’t use your PPP loan as outlined above, there will be a 1% interest rate.
So, which loan is right for you? If you are OK with repaying your loan and you simply need financial assistance for covering operating costs, an EID loan may be a good fit for your needs. Most business owners who have pretty good control over their payroll will opt for an EID loan to help with the business side of things.
If COVID-19 has made it challenging for you to pay your employees, a PPP loan is likely to be more suitable. If, however, you need help paying your operating expenses and paying your employees, you may want to consider applying for both loans.
You can find the EID loan application on the Small Business Administration’s website. And, if you need a valuable loan related advice to help your business grow, these are the business podcasts worth listening to. Lastly, to apply for a PPP loan, you must find an SBA lender that is participating in the Paycheck Protection Program.