Last Updated: May 18, 2022

Best Loan Options for Small Businesses

At the start of the COVID-19 pandemic, you’d probably remember yourself walking past your favorite local pastry shop which you believed to be closed, just temporarily because of the restrictions. But when restrictions have eased up a bit, you notice that the shop was no longer there, and it had been replaced by a new apartment complex.

The debilitating effect of the pandemic is apparent, even more so for small businesses. Of course, a lot of businesses thrived by offering online services, but not everyone had or has the opportunity to make it out alive.

With this in mind, the U.S. Small Business Administration implements two loan programs that can give small businesses a fighting chance against COVID-19 and its long-term effects: the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL).

Let’s walk you through both and find out if you are eligible to apply for either and how you can use the programs together.

Paycheck Protection Program (PPP)

The PPP was established in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act and was later modified by the Paycheck Protection Program Flexibility Act of 2020. It is a loan program that aims to keep small businesses afloat and maintain employment by providing them with funds to pay up to 8 weeks or 24 weeks of payroll costs. A maximum of 40% of the funds can also cover interest on mortgages, rent, utilities, operations expenditures, property damage costs due to public disturbances not covered by insurance, supplier costs, and worker protection expenditures to be COVID compliant.

  • Who Are Eligible to Apply for the PPP?

The PPP is far-stretching as it can cover not only small businesses, but also sole proprietorships, independent contractors, and self-employed individuals.

  • How Much Can I Receive?

In General: The amount of funding to be received is based on the borrower’s monthly average payroll cost in 2019, 2020, or the one-year period before the application multiplied by 2.5, which amount must not exceed $2 million.

Food and Accommodation Industries: For businesses under these industries, the fund is valued at 3.5 times the average monthly payroll cost, which shall not exceed $2 million.

Seasonal Employers: A seasonal employer can use any 12-week period between February 15, 2019 and February 15, 2020, to compute his/her monthly average payroll cost.

  • PPP Loan Forgiveness

The important feature of the Paycheck Protection Program is loan forgiveness, wherein all expenses relating to payroll costs, mortgage interest, rent, utilities, operations expenditures, property damage costs due to public disturbances not covered by insurance, supplier costs, and worker protection expenditures covered by the fund can be forgiven. Borrowers can apply for forgiveness at any time until the maturity date of the loan.

The full loan amount can be forgiven, provided that at least 60% of the fund was spent on payroll. Furthermore, the borrower must maintain an average monthly number of full-time employees equal to or higher than the average monthly number of full-time employees during the previous one-year period.

Economic Injury Disaster Loans (EIDL)

The EIDL is a long loan standing program of the Small Businesses Administration which was expanded by the CARES Act to curb the economic impact of the COVID-19 pandemic. Because of this, all U.S. States, territories, and tribes have been declared disaster areas insofar as the EIDL is concerned, to be able to cover small businesses affected by the pandemic.

The purpose of the EIDL is to provide small businesses with capital to support financial obligations and operating expenses that could have been met if not for the disaster that occurred. The causes for which the fund can be used are broad, but they cannot be used to expand the business. Thus, it cannot be used for the payment of dividends and bonuses, disbursements to owners (except when directly related to the performance of services), repayment of stockholder/ principal loans, expansion of facilities or acquisition of fixed assets, repair or replacement of physical damages, and relocation.

  • Who Are Eligible to Apply for the EIDL?

Similar to the PPP, all small businesses, sole proprietorships, and independent contractors can apply for EID, as long as there is proof that the business has suffered severe economic injury due to the pandemic.

  • How Much Can I Receive?

Up to $2 million can be disbursed to businesses who qualify at a rate of 3.75% for businesses and 2.75% for non-profits with a 30-year maximum term.

  • EIDL Loan Forgiveness

Unlike the PPP, EIDL does not offer loan forgiveness. An EIDL can be forgiven by the SBA under special circumstances and only if the business needs to shut down and dissolve.

Can A PPP and EIDL Be Applied Simultaneously?

A PPP loan and EIDL can be used together, but the funds cannot be used for the same purpose. If used for the same purpose, a PPP loan may be required or may not be allowed, to refinance an EIDL, depending on the date when the EIDL fund was received.

  • When A PPP Loan MAY NOT Refinance An EIDL

Based on the SBA Procedural Notice, an EIDL loan may not be refinanced by a PPP loan if the PPP borrower received the EIDL fund before January 31, 2020 or after April 3, 2020.

  • When A PPP Loan is NOT REQUIRED to Refinance An EIDL

A PPP loan is not required to refinance an EIDL if the PPP borrower received the EIDL loan before January 31, 2020 or after April 3, 2020 AND the EIDL loan was not spent on payroll costs.

  • When A PPP Loan MUST BE Used to Refinance the Full Amount of An EIDL

A PPP loan must be used to refinance the full amount of and EIDL if the PPP borrower received the EIDL before January 31, 2020 or after April 3, 2020 AND the EIDL loan was used for payroll expenses.

The Value of Small Businesses

With the COVID-19 pandemic reigning over the world and injuring the economy, it is at this moment that small businesses must thrive and be provided with opportunities to grow as they are the backbone of the economy, accounting for about 32.5 million businesses and creating around 1.5 million jobs annually.

Reach out to MBE CPA today to know more about PPP and EIDL loans.