Sean Kelly, CPA
Senior Tax Manager
April 27, 2020
Both the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan Emergency Advance (EIDL) have received a combined $370 billion of new funding after the original $349 billion dried up in just 13 days. If you qualify for one or both loans, but haven’t applied yet, you may be out of luck if you don’t act right now. Here’s what you need to know about each program.
The PPP loan is designed to provide funding to businesses impacted by COVID-19, so that they can maintain their payroll and minimize layoffs and furloughs. Generally, businesses with fewer than 500 employees, including self-employed businesses with no employees qualify for the program. The loan maxes out at $10 million or 2.5X the average total monthly payments for payroll costs during the 1-year prior to issuance of the loan. Keep in mind that 75% of the loan proceeds must be used for payroll and the remaining 25% must be used for certain expenses including mortgage interest, rent and utilities. Proceeds used for these purposes during the first eight-weeks after receiving the loan qualify for loan forgiveness. For more information, read: What Businesses Need To Know About The CARES Act.
If you missed out on the first-round of funding, you need to reach out to your local bank immediately to see if they will accept new applications as the new funding is expected to dry up quickly, perhaps in as few as three days. If you have already applied for the PPP loan but didn’t receive funding, make sure you contact your bank to see if they will reprocess your original application or if you will need to submit a new one.
Mounting pressure has resulted in several publicly traded companies, including Shake Shack, Potbelly, and Ruth’s Chris Steakhouse, returning their loans. The Treasury Department has given other publicly traded companies until May 7th to voluntarily return their loans unless the loans were necessary to support ongoing operations. According to Morgan Stanley, at least $243.4 million of the $349 billion first-round funding was provided to publicly traded companies. The Treasury updated their PPP Q&A section on April 26th, stating borrowers must certify in good faith that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” They go on to specifically call out public companies, stating “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification.” After public outcry over first-round funding ending up in the hands of large companies, the new wave of funding will provide $310 billion of funding, with $60 billion set aside for small-and medium-sized community banks.
An additional $60 billion has gone in to replenish the EIDL. Like the PPP loan, the EIDL also has a 500 or fewer employee requirement and businesses must have been in operation as of January 31, 2020. The EIDL also offers loans up to $2 million with a 3.75% interest rate and repayment term of up to 30 years. A loan advance of $1,000 per employee, up to $10,000 is available, and this advance doesn’t need to be repaid.
Use of the loan proceeds is more relaxed than with PPP loans. EIDL loan proceeds can be used for any business purpose, however the funds cannot be used for physical repairs, expansion, bonuses or refinancing debt. If you have already applied for the EIDL, your application is already in the queue with the Small Business Administration (SBA) and will be processed on a first-come first-served basis – you do not need to reapply. Unlike the PPP loan, which must be applied for through a bank, the EIDL loan application is submitted directly on the SBA website.
Both loan programs have favorable terms for struggling businesses. We strongly recommend working with your advisor to make sure your applications are accurate and complete, as this will maximize the chances that you are approved before funds run out again.