The U.S. Small Business Administration (SBA) has made several programs available to help small businesses. The Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program (PPP) loan are two very aggressive pieces of legislation that were passed in order to combat the significant impact that COVID-19 has had on the economy of the United States and, more importantly, main street businesses. Although many articles have been written explaining the details of the loans, very few articles have been written explaining how and why business owners should go about choosing the various loan options.
While both loan options provide a way to infuse capital into your business, there are several things to consider when choosing between one loan over the other or both. First, it’s important to note that even though business owners can apply for both loans, the loans cannot be used for duplicative purposes. Business owners who have previously applied for the EIDL can subsequently refinance their loan into the PPP to qualify to have the loan amount forgiven (pending successful approval). Now that both loans are available, business owners should carefully consider what their needs are. For example, a service business whose primary asset is its employees would be best suited to apply exclusively for the PPP while a manufacturing company that may require funds to not only pay employees but cover working capital costs as well may benefit from the EIDL. Business owners should work closely with their CPA or financial advisor to determine which loan option is best suited for their immediate needs.
As previously mentioned, under the PPP, any amounts used for a specific purpose during the 8 weeks following the disbursement of the loan can be forgiven. The process of forgiving the loan is going to be based on specific, measurable criteria which will include the amount of your payroll costs during the 8 week period, the number of employees you retained, and the amount of the funds used for payroll versus other approved expenses. This will require taxpayers to maintain a detailed record of how the funds were utilized. One suggestion is to deposit the funds into a bank account setup exclusively for the purpose of keeping these funds separate from other cash accounts. While this may be extreme, it would be prudent of any business owner to take extra measures to ensure a smooth application process when it comes time to apply to have the loan forgiven.
Another item for business owners to consider is the use of the loan. Businesses with a limited number of employees will be better suited to apply for the EIDL loan which offers more beneficial repayment terms which include a 3.75% interest rate up to 30 years and longer list of acceptable uses. Alternatively, if owners were to apply for the PPP loan and subsequently use it for non approved expenses which would require that they have to pay it back, they would be stuck with a loan which would have a 1% interest rate and would be due in 2 years! For example, a $300,000 loan that needs to be repaid would require the business to remit over $12,500 a month for two years. Furthermore, with such a low interest rate, the amount of the deductible interest would be minimal.
Regardless of the loan options owners choose, you should always consult your CPA or lender to understand the implications for your business.
For more detailed information view the original article on the SmartBooks website and download a helpful Comparison Chart.