The fight against the coronavirus would not have been initiated in an effective manner had those in charge of governance not announced any stimulus packages for businesses to allow them to pay for essential expenses – including the salaries of their staff. The Payment Protection Program (PPP) is a part of a recently announced stimulus package that aims at providing the financial assistance worth more than $400 billion to help small business.
The Small Business Administration, however, already had the Economic Injury Disaster Loan Assistance (EIDL) program in place that was launched to rebuild and repair private sector disaster losses. In the wake of the coronavirus pandemic, under this program, qualifying patients will be able to receive advance of up to $10,000.
Differences Between the PPP and the EIDL Plan
On surface, the two programs seem identical. However there are some intricate differences that you must pay attention to when deciding which protection plan is ideal for you. Let’s have a look:
The EIDL Plan
Under this program, the SBA is the lender. The qualifying people include businesses with 500 employees or less. Sole proprietors and independent contractor are also eligible for the plan. Here is a brief list of people who can apply to the program:
- A cooperative with not more than 500 employees
- A tribal small business concern with not more than 500 employees – refer to 12 U.S.C. 657a(b)(2)(C) to have an idea of which entities are classified as tribal small business concerns
- An Employee Stock Ownership Plan (ESOP) with not more than 500 employees – refer to 15 U.S.C. 632 to learn more about the ESOP
- A small – as per SBA Size Standards – nursery, aquaculture enterprise, agricultural cooperative, or producer cooperative
- A business that has more than 500 employees but that qualifies as small business in compliance to SBA standards.
There are some affiliation rules that must be carefully read when applying to the problem. The SBA thoroughly vet companies’ affiliations to determine whether the company can no longer be defined as ‘small’. Under affiliations agreement, generally, one business either controls or has power to control another business. At time, businesses are said to be affiliates when a third party either controls or has the power to control both the businesses.
The maximum amount of loan that you can avail under this program is $2 million. In addition to this, applicants can also apply for the $10,000 advance as soon as they submit the application. The advance is normally distributed within three days. Even though the program doesn’t have any forgiveness clause, in case, the applicant doesn’t qualify for the entire loan program, they will not have to repay the advance. The $2 million loan provided to qualifying applicants has the term of up to 30 years. The first payment is due one year after the loan origination date.
The loan is specifically used for financial obligations and other essential operating expenses that have otherwise been covered had the business been running smoothly. For the collateral, the SBA will place a UCC lien against the business’s assets.
The Paycheck Protection Program
The coronavirus pandemic has taken everyone by surprise. No country or government was prepared to prepare for the disaster of this magnitude. For governments, it was necessary to launched stimulus packages that would prevent the economy from collapsing. The Paycheck Protection Plan (PPP) is one such loan option for small businesses that help them meet their financial obligations.
Under this bank, a bank – which is already an SBA lender – will play the role of a lender. The following are the lists of some of the businesses and organizations that can apply to the program:
- Entities and businesses that were in operation on February 15, 2020.
- Tribal businesses, small businesses, 501(c)(19) veterans organization, or 501(c)(3) non-profit organizations.
- Sole proprietors, self-employed individuals, and independent contractors.
Under this program, affiliation rules have been waived. The organizations on whom the waiver applies are as follows:
- Businesses that have been assigned a NAICS code beginning with 72 – for such businesses the less than 500 employees rule has been changed to 500 employees per physical location.
- Companies that relies on a Small Business Investment Company for funding
- Business concerns that are assigned a franchise identifier code by the SBA
The maximum loan given under this program is $10 million. The loan calculations are done on the following basis:
- If a company was in business in February 15, 2019 – June 30, 2019, the max loan is 2.5x the average monthly payroll costs.
- For companies who were not in business during the above period, the maximum loan will be 2.5x the average monthly payroll costs that occurred between January 1, 2020 and February 29, 2020.
- If during the February 15, 2020 and June 30, 2020 period you took an EIDL loan and you are now looking to refinance that into a PPP loan, the outstanding amount of the loan will be added to your payroll sum.
The annual interest rate of the loan is 1% for the unforgiven portion of the loan. The term of the loan is 2 years and the first payment is due six months after the loan origination date. The permitted costs for which the loan can be used include:
- Employee salaries, commissions, or other related expenses
- Health insurance premiums
- Payments of interest on mortgage – not including payments of principal or prepayments
- Rent
- Utilities
The loan program also has a forgiveness clause. The amount calculated for forgiveness is based on the amount spent during an 8-week period on permitted costs. For the loan, no collateral is required from either business or the business owner.
The Final Word
Both plans have been launched to help businesses deal with disaster situations that cripple their ability to carry out their daily operations smoothly. Which plan is convenient for you depends on your business structure, the expenses, etc. Before opting for a plan, you must consult with a financial advisor to know all the nitty-gritty of the two plans, which will help you make a wise decision.