The Paycheck Protection Program Versus the Economic Injury Disaster Loan Program of the CARES Act
On Friday, March 28, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the single largest economic relief package in U.S. history at $2.2 trillion or about 10% of GDP.
There are two loan programs in CARES to benefit small businesses, generally defined as 500 or fewer employees. Because the two loan programs overlap somewhat there may be some confusion on whether to apply for the Economic Injury Disaster Loan ($10 billion), the Paycheck Protection Program ($350 billion), or maybe both.
There is one “shiny object” reason to apply for the Economic Injury Disaster Loan: a grant of up to $10,000 just for applying! Under the EIDL program, an applicant may request an advance within 3 days of filing with SBA for the loan. The advance is in essence a grant that must be used for allowed uses only including paid sick leave for COVID-19 related reasons, maintaining payroll during disruptions or slowdowns, increased costs due to supply chain interruption, rent or mortgage payments, or repaying obligations due to revenue loss.The advance does not have to be repaid even if the EIDL request is ultimately denied. If the EIDL applicant subsequently is approved for or transfers into the PPP loan, the advance amount will be netted out of any grant provided in that program.
Which loan program is best for you, will depend on the facts of your particular situation thus, reviewing a more robust comparison of the two loan programs is advised before making a decision.
Key Differences Between the EIDL and PPP
A. Grant Element Under Each Program
The EIDL program includes the $10,000 grant described above whereas the PPP program includes a loan forgiveness program calculated using a formula intended to incentivize employers to retain and rehire employees. If you have more than $10,000 in payroll and payroll related expenses in the first 8 weeks after receiving the loan (and taking into account some complexities outlined in the next paragraph) the PPP grant might be more favorable. You have to apply the formula and determine the grant amount. Of course, the grant comparison should not be the only factor you consider.
The amount forgiven for the PPP loan includes what is used in the first 8 weeks after the loan is made for the sum of payroll costs, mortgage obligations (liability, mortgage on real or personal property, but not prepayment or principal payment, incurred before 2/15/20), rent and utilities.The loan amount is reduced by a percentage reflecting any decrease in the number of employees by comparing the number of employees during the 8 week period divided by the number of employees from the period 2/15/19-6/30/20 (or using 2020 if it is a new company).The loan amount is also reduced by any decrease in salary that is more than 25% during the 8 week period.There will be no reductions for the number of employees or salary if reinstated or if their pay is raised back by June 30, 2020.
B. Number of Employees for Eligibility
For the EIDL program, the small business is defined according to an industry standard SBA has developed.The number of employees is generally 500 but can go up to as many as 1,500. There is also an annual revenue limit that appears to be around $35 million but varies according to the industry. In general, all “affiliates” must be aggregated for determining the number of employees with affiliates defined as when one business “controls” another or when a third party controls both, through ownership, management or other relationships. (13 CFR 121.103)
For the PPP program, the business must have been in operation on 2/15/20 and have 500 or fewer employees.For certain businesses in the accommodation and hospitality industry, 500 employees can be determined per physical location (affiliation rule will be waived for determining loan amount determination, etc.).The affiliation rule is waived for certain franchises. Sole proprietors and contractors do not have to meet the 500 employee rule. So, if you are a company in the hospitality industry with more than 500 employees based on affiliation, the PPP program would only be available to you.
The lender for EIDL program is the SBA whereas the PPP program will be administered through SBA approved banks.(Caveat: we expect the SBA will soon provide additional guidance on the details of this program.)The EIDL loans are already available and you can apply now online at the SBA website.The PPP program is not yet in place and although banks may begin taking applications shortly, it will likely be at least a few weeks before banks will be processing loans.
D. Amount of Loan
The maximum loan amount for EIDL loans is $2 million and the maximum loan amount for PPP loans is $10 million. The EIDL loan amount is based on what is needed to meet financial obligations and operating expenses that could have been met but for the disaster. The PPP loan amount is based on a formula that is generally 2.5 months of historical (prior year) payroll costs, including salaries, commissions, tips, certain employee benefits (including healthcare premiums), retirement benefits and state and local taxes. Compensation over $100,000 per employee prorated for the 2.5 month period is disallowed (there are separate payroll cost definitions for a sole proprietor or an independent contractor).The EIDL amount is somewhat discretionary as determined by SBA, whereas the PPP amount is more formulaic, presumably allowing quicker loan processing by banks.
E. Rate and Term
The annual interest rate for EIDL loans is 3.75% for small businesses. The loan rate for the PPP loans is not to exceed 4% and may be significantly lower given current interest rates.
The term of the EIDL loan is 30 years and the term of the PPP loan is 10 years.The first payment on the EIDL loan is due one year from origination date plus interest, and the first payment on the PPP loan will be due from 6 months to a year plus interest, as determined by the lending bank.
F. Collateral and Guarantee
Collateral for the EIDL loans is a UCC lien against the assets of the business, and the PPP loans have no collateral requirements.
A personal guarantee is required for the EIDL loans for owners of more than 20% of the business, managing members of LLCs, managing partners of LPs, but there will be no liens against real estate owned by the guarantor. No personal guarantees are required for the PPP loans.
The EIDL loans should be processed in 2-3 weeks of filing, but getting the documentation to file online is burdensome and time consuming. It is possible to apply for the loans currently online at the SBA website.The timing for when the PPP loans will become available is unknown, but banks should be able to process fairly quickly once the program is operational.SBA will provide loan guidelines to banks and will allow the banks to establish a process in the next few weeks.
H. Applying For Both EIDL and PPP Loans
It is allowable to receive EIDL funding and then apply for a PPP loan for covered PPP payroll costs that were not applied for and received under the EIDL grant. It is allowable to then roll the EIDL loan into the PPP loan. It is not allowable to apply for the PPP and then the EIDL. If you receive the EIDL loan, you do not have to accept and usually have 60 days to decide.
The CARES Act is less than 72 hours old and the SBA is required to issue guidelines for the PPP program within 15 days of enactment.While the EIDL process is established and operational, the PPP program is a few weeks off. It is possible to file for the EIDL loan now online and to seek the $10,000 advance by making the request within 3 days of the loan application.
During this time before the PPP program becomes operational, there is an opportunity for stakeholders to seek clarifications to be addressed in the guidelines or even a technical amendment to the law, so we encourage you to reach out to your attorney to assist you through this process or to inform us of the clarifications you many need at this time.