PPP and EIDL – How To Use Disaster Financing Together

The SBA has two loan programs to help small businesses impacted by COVID-19: Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP). If your business is eligible, you can get both loans, using the funds simultaneously, as long as the use of funds are not the same.

Here’s an overview on these loan programs can work together to help your business weather the coronavirus storm.

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What is the difference between the PPP and EIDL program?

These are two separate SBA programs and the benefits of each depend on your business and unique situation caused by the coronavirus pandemic. Both disaster loan programs specifically serve people affected by natural disasters in the U.S. and the coronavirus applies. All small businesses, including sole proprietors and independent contractors, can apply for COVID-19 relief.

Payroll Protection Program (PPP)

PPP allows businesses borrow up to $10 million in loans that are 100% forgivable if they do not lay off any employees or if they rehire employees they’ve already laid off. Details include:

  • Loan payments will be deferred for 6 months from the date the funds are disbursed and interest will continue to accrue over this period
  • Interest rate: 1.00% fixed rate
  • Loan term: 2 years
  • There are no prepayment penalties or fees

For more details, visit the SBA website.

Economic Injury Disaster Loan (EIDL)

The EIDL allows businesses borrow up to $2 million in loans and offers forgiveness of an up-to-$10,000 loan advance. Details include:

  • Loans may be used to pay fixed debts, payroll, accounts payable, or other bills that can’t be paid because of the COVID-19 outbreak.
  • The interest rate is 3.75 percent for small businesses without credit available elsewhere, and businesses with credit available elsewhere are not eligible to apply for assistance.
  • The maximum term is 30 years.
  • A small business is defined by the SBA’s Size Standards

More details can be found here: EIDL Loan FAQ.

Using a PPP loan to refinance EIDL

If you get an EIDL loan and later apply for a PPP loan, you can refinance the EIDL loan with the PPP loan. With a bigger PPP loan you can use part of the proceeds for approved used and part to pay off your outstanding EIDL.

If the EIDL was not used for payroll costs, it doesn’t have any impact on your PPP loan. However, if you took out an EIDL before April 3, 2020, and used it for payroll expenses, you must refinance the EIDL by carrying over the EIDL balance into your PPP loan.

Here's an example from Bench Accounting Blog:

Say Yami Yoga Studio’s average monthly payroll for the PPP loan amount calculation is $10,000 per month. At 2.5 times their payroll, the maximum loan amount would be $25,000. However, the business also received an EIDL in March of 2020, which has a balance of $15,000. The company could get a $40,000 PPP loan—that’s $25,000 plus $15,000 to pay off the existing EIDL—which is sent directly to the SBA.

Do the use of funds for a PPP and EIDL differ?

Yes and funds cannot be used from both loans for the same purposes.

For example, you can’t use both EIDL and PPP towards payroll. As long as you do not use the EIDL for payroll costs, your PPP eligibility will not be affected. If the EIDL is used for payroll costs, your PPP amount will have to be used to refinance the EIDL.

PPP use of funds

  • Payroll - Salary, wage, vacation, parental, family, medical, or sick leave, health benefits
  • Mortgage interest - As long as the mortgage was signed before February 15, 2020
  • Rent - As long as the lease agreement was in effect before February 15, 2020a
  • Utilities - As long as service began before February 15, 2020

EIDL use of funds

  • Payroll
  • Accounts payable
  • Providing paid sick leave to employees
  • Matching increased costs to obtain materials
  • Rent or mortgage payments
  • Other obligatory payments that cannot be met due to revenue loss

Additional resources

The SmartBiz Loans Blog has frequently updated information about financing and operation during the pandemic. Review these articles for information and strategies to help you get through this time.