PPP and EIDL – How To Use Disaster Financing Together

The SBA has two loan programs to help small businesses impacted by the COVID-19 pandemic: Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP). The first round of PPP funding ran out in 2020 but the 2nd round opened in January and will extend through May 31, 2021 or until funds run out.

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 how the PPP and EIDL program can work together to rebuild your business or keep your doors open.

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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 pandemic applies.

Payroll Protection Program (PPP)

A new round of PPP (Paycheck Protection Program) funding launched in January 2021. Like the first round, PPP loans are available to help small business owners protect employees and rebuild their business. This new round allows more uses for PPP funds while continuing to focus on payroll costs and related expenses. Borrowers who received a previous PPP loan may also be eligible for a second PPP loan.

A PPP loan is best for businesses with less than 300 employees who have been impacted by the pandemic and are applying for their first PPP loan. Previous PPP loan recipients with less than 300 employees can also qualify if they have more than a 25% drop in revenue quarter over quarter from the previous year. If applying for a second PPP loan, the full amount of funds from the first PPP loan must be used before the second is disbursed.

Economic Injury Disaster Loan (EIDL)

The Economic Aid Act signed on December 27, 2020 includes additional funding for the Economic Injury Disaster Loan (EIDL) program.

The EIDL program 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 costs
  • Insurance benefits
  • Employee salaries and/or commissions
  • Rent payments and/or mortgage payments
  • Utilities
  • Software or cloud computing costs for business operations
  • Costs related to property damage and vandalism or looting due to public disturbances not covered by insurance or other compensation
  • Costs of the supply of goods that are essential to business operations
  • Covered worker protection expenditures that help adapt business activities to COVID safety requirements

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

Apply for a PPP loan

The new round of the Paycheck Protection Program is open NOW! The deadline to apply is May 31st, 2021 but it’s suggested that you apply ASAP as the funding ran out for the first round.

SmartBiz Loans is here to help you apply for this new round of PPP funding.

Determine if a PPP loan is right for you or start a streamlined application on the SmartBiz Loans website.

What You Need to Know

The availability of PPP loans remains subject to SBA guidance and other factors, including the amount of funding available to banks and the quantity of eligible applicants considered on a first-come, first-served basis. The information provided above is for educational purposes only. Please consult the SBA’s website for actual rules and the most current guidance.

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.