PPP Loan Forgiveness: The Ultimate Guide

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Economic Injury Disaster Loan VS Paycheck Protection Program Loan

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Economic Injury Disaster Loan VS Paycheck Protection Program Loan

Are you having trouble understanding the difference between the EIDL and PPP? Are you not sure whether you can apply and receive both types of loans? Let’s take a look.

We are living in unprecedented times. The COVID 19 crisis has swept through the country leaving a trail of chaos in its wake. The cities are eerily quiet, the price of oil has gone into negative figures and for companies and business owners the future seems uncertain and bleak. Will any even survive into the future, post lockdown?

To help businesses survive the crisis, there are two main loan programs available. These are the Economic Injury Disaster Loan or EIDL and the Paycheck Protection Program Loan or PPP.

Many business owners are struggling to understand the difference between the two and whether they can apply and receive both types of loans. Let’s take a look.

First up let’s look at the EIDL.

The Economic Injury Disaster Loan

The EIDL offers up to $2 million maximum. It won’t send this to you at once and you may have to jump through hoops to get it (more on that later), but it does provide some much-needed support. The loan includes a $10,000 emergency grant that can be with you within 3 days of applying for the loan.

EIDL Grant Forgiveness Terms

This grant will not have to be repaid as long as you use it for the following scenarios:

  • Maintaining the payroll so that employees can be retained and paid even if production has slowed or has been disrupted.
  • To buy necessary materials, now unobtainable due to the supply chain being interrupted by the virus
  • Paying for rent or mortgage repayments
  • Paying sick leave of employees who are off work because of the COVID virus
  • Keeping to payment obligations and paying off debts that would have been covered by your business revenue in normal times, but is now lost.

EIDL Eligibility

The EIDL is aimed at maintaining smaller businesses but that said there is a wide range of organizations and types of companies that are eligible for the loan. To qualify, your business must be negatively impacted by COVID 19. In addition, you must prove that your business was operational by January 31st, 2020, so it is suitable for start-up companies as well.

Eligible businesses include:

  • Small business, cooperatives, ESOP (Employee Shared Ownership Plan), Tribal businesses, and businesses with up to 500 employees.
  • Sole traders and individuals or independent contractors
  • Agricultural cooperatives or non-profit organizations.

How To Apply For EIDL

To apply for EIDL you have to get in touch with the Small Business Administration or SBA because this is the body that is actually funding the loans.

The application process has been streamlined to cope with the COVID 19 crisis and can be completed online. According to the SBA, the average application takes just over 2 hours to complete.

There is a disclosure that is necessary to prove that you are eligible and there is a warning that if you lie about your information, you could receive a perjury penalty. However, once the SBA has all your details they will be able to proceed with your claim.

The information required is very comprehensive. You will be asked to complete an income statement based on the 31st of January 2020. You will also have to provide your personal details including social security number, birth date, citizenship, and whether you have any criminal convictions.

The SBA will process your claim to ascertain whether or not you are eligible for the loan.

It is important to tick the box indicating that you want to be considered for the up to $10,000 advance because even if your loan is refused, you will probably still be eligible for the emergency grant – which you do not have to repay.

How much does the EIDL cost?

EIDL Payment Terms

Loans cost money and it is important to remember that you will have to pay it back and that there will be interest to pay. The annual rate of interest is 3.75% for businesses with 2.75% for non-profit organizations.

With an EIDL you have up to 30 years to repay the loan and there is no loan forgiveness program.

Do you have to provide collateral or a personal guarantee to obtain an EIDL?

The SBA does require collateral and will take out a UCC Lien against business assets. This means that the lender (in this case the SBA) has some rights of possession of the property until the loan has been paid back in full.

For loans up to $200,000, the borrower must guarantee a 20% stake in the business for the SBA. However this does not affect personal property such as real estate, so if you do default or fail to repay, you will not lose your home.

Do you need to be up to date with your taxes in order to apply for EIDL?

If you have been tardy with your 2019 tax declaration you can still apply for EIDL. That said you will need to give the SBA access to your historical tax returns. To do this you will be asked to submit the IRS form 4506T.

So now let’s look at the Paycheck Protection Program Loan or PPP.

Paycheck Protection Program Loan

This was brought into existence on the 27th March 2020 as the Coronavirus Aid, Relief, and Economic Security Act generally referred to as the CARES Act. It was devised to keep business afloat and provides an added option for lenders who may find that the EIDL may not go quite far enough for their needs. PPP is valid for eight weeks and will be reviewed as the crisis continues. However, do not bank on it becoming extended.

PPP enables you to borrow up to $10 million maximum. This type of loan does not provide any non-refundable payments or grants as with the EIDL. However, if your primary concern is with maintaining your staff and supporting the payroll, PPP may be the better option.

PPP Eligibility

Businesses that are eligible for PPP may include:

  • Small businesses
  • Non-profit organizations under the classification 501 © (3) with fewer than 500 employees
  • Veterans associations classified as 501 © 19
  • Tribal businesses and concerns
  • Businesses operating in the food sector such as restaurants and/ or franchises
  • Sole proprietors or independent contractors.

You can be eligible for PPP and an EIDL as long as you don’t claim funds for the same purpose. For example, you can’t claim the PPP to fund your payroll and then make the same claim via the EIDL.

The types of expenses that are eligible for PPP are all employee-related and include the following scenarios:

  • Payment of Retirement benefits
  • Payment for holiday pay or parental leave
  • Sickness payment or medical leave
  • Allowance for dismissal
  • Tax relating to employee compensation including local or state tax.
  • PPP is not eligible for payroll payments to overseas employees or anyone who resides outside the USA. It is also not permitted to be used to pay compensation to the company owner or employee if the sum is greater than $100, 000.

How To Apply For PPP?

To apply for PPP you can go through any of the 1,800 approved SBA lenders. The loans are provided by any bank that is already an SBA lender, or similar financial bodies such as any federal depository institution, credit union, or participating farm credit system institution.

At the time of writing, multiple lenders are coming forward but there may be a delay in applications depending on funding.

You can check out participating lenders via the SBA website. There you can also apply online via a downloadable form

Because the lenders are all different, you may be required to submit slightly different information and include various documents with your application.

This may include:

  • Tax returns for 2019 and possibly two years previously
  • Comprehensive payroll information including:

– Verifiable payroll expenses

– Payroll reports and corresponding bank statements

– Breakdown of payroll benefits

– Employees details and addresses and certification of residency within the USA

  • A statement of how COVID has impacted your business
  • Evidence of your company’s structure and corresponding legal documentation such as title deeds and ownership.

How much does PPP cost?

PPP Payment Terms

The rates of interest are just 1% on any remaining balance after forgiveness. You have two years to pay off the loan.

What does loan forgiveness mean?

Borrowers can have their loans forgiven if they use the money on designated expenses, meaning they don’t have to pay the money back. They become eligible for loan forgiveness after using the loan for 8 weeks as long as the money is spent on authorized expenses.

The entire payroll may be forgiven and payments such as mortgages and utilities may be forgiven by up to 25% of the cost.

To qualify for loan forgiveness, you have to support your claim with documentation including:

  • IRS documentation verifying payroll information including the number of employees, verifiable payments, state income and all evidence relating to the payroll
  • All documentation regarding mortgage payments and utility payments
  • Certification from your company proving that all information is true and that the money provided was used for the correct purpose of funding the payroll and meeting essential charges, namely rent, mortgage or utility bills
Do you have to provide collateral or a personal guarantee to obtain PPP?

You do not need to provide collateral or a personal guarantee to cover funding in order to obtain PPP.

So Which Loan Is Best?

Economic Injury Disaster Loan or Paycheck Protection Program Loan

The two crisis loans were set up to provide an effective solution to the COVID 19 crisis and address slightly different issues experienced by the business owner.

EIDL is an all-encompassing loan that looks at the way the business operates and provides help in enabling you to keep trading, so this loan can be used for expenses such as buying in supplies.

PPP is predominantly aimed at providing for the millions of employees who would otherwise be currently unpaid. The fund is valid for 8 weeks so it allows some breathing space for employers who would otherwise risk losing their entire workforce.

You can apply for both PPP and EIDL as long as you don’t use the money from both sources for the same purpose. And it does make sense to apply for both because most people will be eligible for the $10,000 EIDL grant which does not have to be paid back.

If you are accepted for both types of loans, you can decide which one to choose. Even if you decide to go for PPP, you do not have to pay back the $10,000 grant from the EIDL. This is a grant to tide you over and to keep your business afloat, so it certainly makes sense to apply for it.

When it comes to which one is best for you, it all depends upon your particular situation. If your payroll is your primary expense PPP is undoubtedly the cheapest option as this loan is likely to be forgiven in its entirety and it also covers 25% of the cost of your premises including rent, mortgage, and utilities.

However, if you need to pay for other expenses not covered by PPP, EIDL provides a long term inexpensive loan to tide you over. Remember this one does not need to be repaid for 30 years and interest rates are extremely favorable, so this one is the better option long term.

Avoid the pitfall of procrastination

Do not fall into the common pitfall of thinking you have to make your mind up before you apply for these loans. The best course of action is to apply for both of them without any more delay.

Putting this decision off is likely to lead to delayed payments, so get your paperwork and documentation in order and download the two application forms right now.

After all, we all need to do our best to maintain the economic future of our country so doing this means you are playing a role in the fightback against COVID 19

Something Wasn't Clear?

Feel free to contact me, and I will be more than happy to answer all of your questions.

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Feel free to contact me, and I will be more than happy to answer all of your questions.