The CARES Act: Comparing SBA Loan Programs – EIDL and PPP

by Kenneth Hrica, CPA Mar 30, 2020 | Share

By now, any business in Maryland, who is in need of funds to get through the COVID-19 crisis, should have already applied for the $10,000 Maryland Small Business COVID-19 Emergency Relief Grant Fund. In an update to their FAQ’s, the grant program states that the business or nonprofit seeking grant funds must also seek longer term funding through its bank, SBA, or other source.  To expedite the application process, we suggest you answer yes to the question, “Are you going to seek SBA Disaster Assistance”.

At this time, we suggest you make an appointment with your bank, as they will be first in line to help you apply for federal relief funds.  We have heard that their spots are filling quickly, so call and make an appointment now. Most likely you will not be able to get into your bank without an appointment.

Following the declaration of a national emergency to combat the Coronavirus (COVID-19) pandemic, the Small Business Administration (SBA) launched the Economic Injury Disaster Loan Assistance (EIDL) program for small business owners in all US states, Washington D.C., and other US territories.  EIDL loans are now available and can be applied for online.

On March 27th, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a stimulus bill that includes a loan program to keep small businesses afloat during mandated COVID-19-related closures.  The CARES Act includes a Paycheck Protection Program (PPP) which authorizes up to $349 billion of federally guaranteed loans to qualifying small businesses. This new loan program is based on the architecture of the SBA’s existing 7(a) loan program and will make forgivable loans of up to $10 million available to qualifying small businesses.

Paycheck Protection Program (“PPP”) loans are meant to encourage small businesses to keep their workers employed through the crisis(up to 8 weeks).

SBA Disaster/EIDL loans are meant to help small businesses recover from economic losses sustained because of the pandemic. The COVID-19 pandemic has prompted special modifications and provisions to the SBA’s EIDL program. Certain key updates to the program are summarized below:

  • The SBA may advance up to $10,000 of the proceeds of an EIDL to an applicant on an expedited basis, within three days after the SBA receives an application. If the SBA ultimately rejects the application, the applicant may retain this initial $10,000 advance without needing to repay it.
  • According to SBA officials, payments of principal and interest under all new and existing EIDLs will automatically be entitled to deferment through the remainder of 2020.
  • Ordinarily, to qualify for an EIDL, an applicant must show that it is unable to obtain credit elsewhere. This requirement is waived.
  • The requirement that an applicant be in business for one year prior to date it applies for an EIDL also is waived, so long as the business was in operation by January 31, 2020.

NOTE: A loan under the Paycheck Protection Program makes the borrower ineligible for the Employee Retention Tax Credit (to be discussed in an upcoming newsletter) made available under the CARES Act. This only applies to the Employee Retention Tax Credit in the CARES Act and does not apply to any credits available under the FFCRA (such as the paid sick leave tax credit) or other credits available under the CARES Act.

Below is a comparison table of the EIDL and PPP loans. This is a checklist to help you decide which loan is right for you – there is not a right or wrong answer.  Just as each business is different, so are individual opinions on how long this crisis may last, and how that influences your choice of relief funds.

Please note that businesses cannot get both EIDL and PPP loans at the same time.  You can apply for the EIDL loan now and the PPP loan when it becomes available.  If you qualify and accept the EIDL loan, and you subsequently qualify for the PPP loan, you can re-finance the EIDL loan with the PPP loan, OR you can apply for both loans and decide which one you take if you qualify for both.  Loans are limited to one per Taxpayer Identification Number.

  Economic Injury Disaster Loan (EIDL) Paycheck Protection Program (PPP)

Low-interest loans for working capital to small businesses suffering substantial economic injury due to COVID-19.

Borrowers can request $10,000 payable three days after application. If the EIDL loan is denied, the advanced funds do not need to be returned.

Low-interest loans to pay Payroll Costs (defined below) for the eight-week period after the PPP is originated.
What period of time is covered? January 31, 2020 – December 31, 2020 February 15, 2020 – June 30, 2020
Who is eligible?

Any small business or nonprofit organization that has suffered substantial economic injury due to COVID-19.

As a general guide, the small business must have less than 500 employees and $35 million in revenue to qualify.

Businesses and entities must have been in operation on February 15, 2020 and have 500 or fewer employees.

Individuals who operate a sole proprietorship or as an independent contractor and eligible self-employed individuals.

Nonprofits qualify.

What can the loan be used for? Financial obligations and operating expenses that could have been met had the disaster not occurred Payroll costs (as defined below), group healthcare benefits, insurance premiums, and interest (but not principal) on mortgages or other debt incurred prior to February 15, 2020, rent on any lease in force prior to February 15, 2020 and utility payments
Who is the lender? The SBA Bank that does SBA 7(a) Loans, underwritten by the SBA
What is the maximum amount that can be borrowed?

The maximum loan size is $2 million.

Applicants who apply for this loan may request an advance of up to $10,000 from the SBA. The advance will be distributed within 3 days. Applicants are not required to repay this advance if they are subsequently denied a loan.

Proceeds may be used to pay fixed debts, payroll, accounts payable and other bills that cannot be paid because of the disaster’s impact.

The lesser of (i) 2.5 times the average total monthly Payroll Costs for the prior year or (ii) $10 million

Payroll Costs include: employee compensation; payments for vacation, parental, family, medical or sick leave; severance payments; group health care benefits and insurance premiums; retirement benefits; and state and local employment taxes. Commissions are included for self-employed and independent contractors.

Payroll Costs DO NOT include compensation to employees in excess of $100,000. Excludes employees outside the U.S.

Proceeds may be used to pay payroll costs, mortgage interest, rent and interest on pre-existing loans.

What is the annual interest rate? 3.75% for businesses, 2.75% for non-profits Not to exceed 4%
What is the term of the loan? Up to 30 years Up to 10 years (if not forgiven)
When is the first payment due? One year after the loan origination date (interest is accrued during the deferment) At least six months after the loan origination date (interest is accrued during the deferment)
Is there a loan forgiveness program? No

Yes – calculated as the amount spent by the borrower during an 8-week period after the origination date of the loan on: payroll costs (as defined above), interest payments on any mortgage, payment of rent, and payments for utilities.

Payroll costs are subject to the same exclusions as noted above.

What reduces the forgiveness? Not applicable

Following the Covered Period, borrowers may submit an application to their Lender for Loan Forgiveness. The maximum Amount of Loan Forgiveness will be reduced (but not increased) proportionally in accordance with any reduction in the number of employees or salaries during the Covered Period when compared to the prior calendar year.

Borrowers who re-hire workers previously laid off from February 15, 2020 through 30 days after the enactment of the CARES Act, shall not have those numbers counted against them for loan forgiveness purposes, so long as those workers are rehired no later than June 30, 2020.

The remaining balance (the unforgiven portion) will have a maximum maturity of 10 years from the date the borrower applies for forgiveness.

What collateral is required? For loans over $25,000, the SBA will place a UCC lien against the assets of the business. None
Is a personal guarantee required? Yes, for loans over $200,000. However, no liens will be taken against real estate owned by the guarantor. No
Do I need to have filed my 2019 Taxes to apply? No, 2019 Taxes do not have to be filed prior to applying for the loan. However, businesses will be asked to submit IRS form 4506T, which provides the SBA with access to historical tax returns Will depend on the lender
What is the application process?

Applicants exclusively deal with the SBA. Applications are submitted electronically or by mail. You are required to provide:

  • 2019 Federal Tax Returns (or an explanation if not available)
  • Personal Financial Statements (SBA Form 413) for each applicant and principal owning 20 % or more of the applicant
  • Applicant’s debt Schedule (SBA Form 2202)
  • Confirm whether have business interruption insurance

The SBA determines final loan terms on a case-by-case basis after valuating each applicant’s needs. Ultimately, loan terms are predicated on the economic injury sustained and an applicant’s ability to payback its obligations.

Applicants apply through third-party private lenders. This includes most national and local lenders. You are required to provide (Subject to change and to lender requirements):

  • Business tax returns for three prior years
  • Personal tax returns for each principal owning 20% or more of the applicant
  • 2019 Federal Tax Returns (or an explanation if not available)
  • Personal Financial Statements (SBA Form 413) for each applicant and principal owning 20 % or more of the applicant
  • Applicant’s debt Schedule (SBA Form 2202)
  • Corporate Records/Ownership Information
  • Business licenses
  • Loan Records
  • Business Description and history

NOTE: As of March 30, 2020, applications were not yet
being accepted.

How long will the application process take?

2-3 weeks plus an additional 5 days for funding

Applicants who apply for this loan may request an advance of up to $10,000 from the SBA. The advance will be distributed within 3 days. Applicants are not required to repay this advance if they are subsequently denied a loan.

Unknown at this stage
Can I apply now? Yes, the application process is live, and loans are available now. There is no obligation to accept the loan if you qualify. The SBA typically allows 60 days to accept the loan offer, but you can always extend this if needed. Therefore, it is better to apply ASAP No. Now that the CARE Act is law, the SBA will give their loan guidelines to the banks. The banks will then prepare their loan application process.

What remains to be seen is how fast the SBA responds to what is sure to be an overwhelming number of requests to obtain loans under these programs. As with all aspects of COVID-19, this is a fluid and rapidly changing environment and SBA loan applicants should closely monitor developments.

According to United States Secretary of the Treasury, Steven Mnuchin, “We’re going to have a new program up by next Friday(April 2nd) where banks can lend. I mean that — that would be a historic achievement that is just incredibly aggressive. This is a brand-new program, the Treasury working with the SBA. We’re doing everything we can because Americans need that money now. They can’t wait for government to take three or four or six months like we normally do.”

Remember, we are here to help you in every way possible.  Please reach out to us with any questions you may have and let us know if you need assistance with any loan applications.

We want all of our clients to make it through this unprecidented time. We sincerely care for every one of you and are doing everything we can to help, especially keeping you up to date on new laws and your releif options. If you know of a business, friend or relative who could also use our help during this crisis, please refer them to us.

Just as we strive to help you every step of the way, we can help the people important to you by taking them on as a monthly client to prepare financial statements and tax returns needed for loan applications, preparing tax returns that individuals need to have filed to qualify for stimulus checks, as well as other specific needs they may have during this time.

Again, we want to hear from you.  Let us know how we can be of service.

Take care,
Ken, Alan, and Tracey

About the Author

Kenneth Hrica, CPA

Ken Hrica joined Century Accounting & Financial Services full time in 1991, after working for several years in public accounting with Ernst & Young and acquiring his CPA license. With almost 35 years at Century, Ken has recently taken over the firm and its management. The value he brings to his clients lies in his vast experience, working with hundreds of individuals, businesses and non-profit organizations. Ken’s hands on approach includes getting new clients’ records up to date, helping new clients properly set up their books, assisting in making decisions on business structures, and payroll advice, such as should you issue a 1099 vs. a W-2. He advises all clients, new and long term, in many other financial areas of their business including tax planning and tax preparation. He also helps clients deal with the IRS, from back taxes to installment agreements.

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