SBA Loan Programs Offer COVID-19 Relief: Economic Injury Disaster Loan Program (EIDL) and the Paycheck Protection Program (PPP)

If your small business has suffered cash flow problems due to COVID-19, the government is providing emergency financial relief through two new loan programs.

By , Attorney

If your small business is facing financial uncertainty in the wake of the COVID-19 outbreak, you are not alone. To help businesses stay afloat, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Consolidated Appropriations Act of 2021 (the new stimulus bill).

The CARES Act provides economic relief to businesses impacted by the coronavirus pandemic through new and expanded loan programs, including the Economic Injury Disaster Loan Program (EIDL) and the Paycheck Protection Program (PPP). The new stimulus bill allocates additional funding for both programs. If your small business is suffering cash flow problems due to COVID-19, you should consider applying to one or both of these loan programs. Loans will be done on a first come first served basis and there is limited funding so you should get your application in as soon as possible.

Economic Injury Disaster Loans (EIDL)

The Small Business Administration's (SBA) Economic Injury Disaster Loan Program (EIDL) was created to offer disaster relief to people in federally declared disaster areas. In response to the COVID-19 crisis, the CARES Act allocated an estimated $10 billion to the program and made it available to all businesses in the United States that suffered a substantial economic injury due to COVID-19. The Consolidated Appropriations Act of 2021 appropriated an additional $20 billion in funding to this program.

Who Is Eligible for an EIDL loan?

Any business that falls into one of the following categories is eligible for an EIDL loan:

  • small businesses with fewer than 500 employees (including corporations, partnerships, and limited liability companies)
  • private nonprofit organizations (501(c)(3) nonprofits)
  • individuals operating as a sole proprietor or independent contractor, and
  • cooperatives and certain other entities like Employee Stock Ownership Plans (ESOPs) and tribal businesses.

Only businesses in existence on January 31, 2020, are eligible for EIDL loans. There is no longer a requirement that the business has no other credit available.

What Are EIDL Loan Terms?

Businesses can apply for loans of up to $2 million. The loans are long-termup to a maximum of 30 yearswith an interest rate of 3.75% for small businesses and 2.75% for nonprofits. The actual amount of the loan and its term are determined on a case-by-case basis. Businesses must use the money to pay for operating expenses and other business expenses that cannot be met due to COVID-19.

No collateral is required for loans of up to $25,000, and loans of up to $200,000 can be approved without a personal guarantee. In addition, the SBA is authorized to approve loans based solely on the borrower's credit score; no prior tax returns are required. Borrowers don't have to pay interest during the first year after the loan is approved, although interest accrues during that period.

The loans are made directly by the SBA and can be applied for from the SBA website.

Emergency $10,000 EIDL Grant

Emergency EIDL cash advances of up to $10,000 are available for businesses experiencing a temporary and urgent need for cash due to the COVID-19 crisis. To be eligible, you must have applied for an EIDL loan from the SBA before December 31, 2020, and you must meet all their loan eligibility requirements. Emergency advances are supposed to be available within three days after the SBA receives the EIDL application.

The $10,000 emergency funds must be used to pay certain expenses related to COVID-19, including:

  • paid leave for employees
  • payroll
  • mortgage and lease payments
  • repayment of debt, and
  • costs due to supply chain disruption.

The $10,000 advance never has to be repaid if it is used exclusively for permitted purposes, even if the SBA ultimately denies the EIDL loan application. However, if you secure a Paycheck Protection Program loan (see below), the $10,000 EIDL grant amount will be subtracted from any amount that is forgivable under the PPP. You apply for the cash advance through the SBA website.

Second Round of EIDL

The Consolidated Appropriations Act of 2021 increased funding to the EIDL programming and extended the application period through December 31, 2021. Businesses with fewer than 300 employees that suffered an economic loss of at least 30% are eligible for advance grants of up to $10,000. If your business previously received an EIDL grant of less than $10,000, you can apply for additional funding for a total of $10,000 between both grants. For example, if you received $4,000 under the first round of EIDL grants, the maximum amount your business could receive under the new program is $6,000. For more information, check out the SBA website.

Paycheck Protection Program (PPP)

With the goal of protecting employees and helping businesses meet payroll costs in the wake of the COVID-19 crisis, the Paycheck Protection Program (PPP) provides cash to small businesses by issuing government-backed loans through SBA-approved lenders. Unlike EIDL loans, you apply for PPP loans at a local banking institution instead of directly from the SBA. The Consolidated Appropriations Act of 2021 allocated an additional $284.5 billion to the PPP program.

What Is a PPP Loan?

PPP loans are available to businesses with fewer than 500 employees that were in operation on February 15, 2020. Individuals operating as a sole proprietor or independent contractor and 501(c)(3) nonprofits are also eligible for PPP loans. You must have employees to apply for a PPP loan since the loan amount is based on payroll.

The amount of the loan can be 2.5 times the business's average monthly payroll costs during the year prior to the loan, up to $10 million. The maximum interest rate allowed on the loans is 4% and the maximum term is ten years. No collateral or personal guarantees are required for PPP loans and no payments are due for the first six months to one year.

The money from the loans can be used for payroll and certain other expenses like rent, mortgage interest, and utilities.

PPP Loan Forgiveness

One of the major benefits of a PPP loan is that it may be partially forgiven. Money spent during the first eight weeks does not have to be paid back if it is spent on certain specified costs including:

  • payroll costs for employees who earn under $100,000
  • rent payments
  • mortgage interest, and
  • utility payments.

To be eligible for loan forgiveness, the business must not lay off any of its employees for at least eight weeks after the date of the loan. If employee's wages are cut or employees are laid off during this eight week period, the amount of the loan that is forgivable will be reduced unless the employees are rehired by June 30, 2020. There are certain documentation and other requirements that must be met to qualify for loan forgiveness.

Second Round of PPP

The new stimulus bill appropriated additional funding to the program and reopened applications for first-time and repeat borrowers. You can apply for funding under this round of the program if your business has fewer than 300 employees and you saw at least a 25% decrease in revenue. The deadline for applications is March 21, 2021. For more information, see "How Much Money Can Your Business Get From the Paycheck Protection Program (PPP)?."

Loan Request Delays and Uncertainties

Both the SBA and banks were overwhelmed by the number of loan applications received in the first few weeks after the loan programs opened. Applicants to both the EIDL and PPP loan programs have faced delays and uncertainty in trying to get their applications processed and approved. There is no data yet on how many businesses have received money under the loan programs.