PPP And EIDL Loan Advances And Changes Under New Act

As of December 27, 2020, the President signed the stimulus bill that includes the emergency Economic Injury Disaster Loan (EIDL) grant funding and Paycheck Protection Program (PPP) loans. It is expected the SBA will issue guidance and instructions for applying in the next couple of weeks, possibly in early January 2021.

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Below, we spell out the differences to date in this new round of emergency funding through EIDL and PPP programs. It’s advised by financial professionals to apply as soon as the PPP applications are open before the funds run out or the May 31, 2021 deadline is reached.

The U.S. Small Business Administration announced that the deadline to apply for the Economic Injury Disaster Loan (EIDL) program has been extended to December 31, 2021 as a result of the recent bipartisan COVID-19 relief bill passed by Congress and enacted by President Trump on December 27, 2020.

What is an EIDL loan?

An Emergency Injury Disaster Loan provides economic relief to small businesses and nonprofit organizations that are currently experiencing a temporary loss of revenue. As part of the EIDL, an advance of up to $10,000 is available for those who apply for the EIDL. The advance portion of the loan will be based on the number of employees in your business and will be $1,000 per employee, up to 10 employees (or $10,000). The loan advance does not have to be repaid.

Unlike the PPP, the EIDL advance, as well as the entire EIDL, are considered working capital loans and may be used to pay fixed debts, payroll, accounts payable, and other bills that could have been paid had the disaster not occurred. These loans are not intended to replace lost sales, profits, or to pay for expansion and cannot be used to pay down long-term debt. They cannot be used to consolidate debt.

What are the new guidelines for EIDL?

The Act replenishes the EIDL Advance fund, which allows businesses to apply for an advance that does not need to be repaid or up to $1,000 per employee limited to $10,000 in total.

Prior law stated that any EIDL Advance received would reduce PPP Loan Forgiveness, essentially requiring the Advance to be repaid. The new Act repeals this provision so receiving an EIDL Advance no longer impacts PPP loan forgiveness.

What are the EIDL details?

The new EIDL details from the official SBA website include:

Rates

  • 3.75% for businesses (fixed)
  • 2.75% for nonprofits (fixed)
  • 30 years
  • No pre-payment penalty or fees

Use of proceeds

Working capital and normal operating expenses. Example: continuation of health care benefits, rent, utilities, fixed debt payments.

EIDL funds cannot pay-off old debts, refinance another debt, or buy capital assets, new construction, vehicles, etc. By law, SBA disaster loans cannot ‘compete’ with private sector lending.

NOTE: Keep EIDL funds in a separate account to avoid mixing EIDL proceeds with other funds. This will help you demonstrate how you used EIDL funds if requested.

Collateral requirements for EIDL loans

Collateral is required for loans over $25,000. The SBA uses a general security agreement (UCC) designating business assets as collateral, e.g. machinery and equipment, furniture and fixtures, etc. For information about UCC, visit the SmartBiz Small Business Blog: What is a UCC Search? What You Need to Know.

Forgivable

The EIDL advance grant is forgivable up to $10,000.

While the cash advance is essentially a grant and does not need to be repaid even if the applicant is not approved for an EIDL, the rest of the EIDL must be repaid according to the terms agreed upon by the SBA and the borrower.

Maturity

30 years.

Payments

Deferred 1 year; interest still accrues. Borrower may make payments before that time if they choose to do so.

Who are these loans for?

Businesses must be located in a low-income community, they must have suffered at least a 30% economic loss during an 8-week period between March 2, 2020, and December 17, 2021, they cannot employ more than 300 people, they must be a qualifying small business, private non-profit, sole proprietorship, or independent contractor

EIDL assistance is available only to small businesses when SBA determines they are unable to obtain credit elsewhere.

Eligibility and terms

The interest rate on EIDLs will not exceed 4 percent per year. The term of these loans will not exceed 30 years. The repayment term will be determined by your ability to repay the loan.

A business may qualify for both an EIDL and a physical disaster loan. The maximum combined loan amount is $2 million.

How to apply

You can apply online for an SBA disaster assistance loan.

You must submit the completed loan application and a signed and dated IRS Form 4506-T giving permission for the IRS to provide SBA your tax return information.

What is a PPP Loan (Paycheck Protection Program)?

The previous Paycheck Protection Program, part of the CARES Act, provided forgivable loans of up to $10 million to businesses with fewer than 500 workers and the self-employed. The intent of the Act is to help small businesses keep employees on the payroll after the pandemic forced them to shutter their operations.

The new PPP program is similar with differences outlined below.

What are the new details of PPP 2nd round loans?

The Act changes PPP basically in the following ways:

  • First, the Act allows new PPP loan applications to be submitted by eligible applicants that never obtained a PPP loan.
  • Second, the Act permits some businesses that have already obtained a PPP loan to obtain a second PPP loan, called a "PPP second draw,” if they demonstrate at least a 25% percent drop in revenues in any quarter in 2020 compared to the same period in 2019.
  • Third, the Act changes PPP rules—for existing PPP loans, new PPP loans, and PPP second draws—in the areas of eligibility, allowable expenses, forgiveness, and more.  Whether you already have an existing PPP loan, are interested in obtaining a PPP loan, or want to obtain a PPP second draw, the Act makes changes to PPP rules that may be relevant to you.

Who qualifies for 2nd round PPP funding?

Qualified businesses, some nonprofit organizations, self-employed workers and independent contractors are able to apply.

Sole proprietors, independent contractors, and eligible self-employed individuals are also able to apply for this second round of funding.

New: The PPP program has been updated to now include eligibility for certain housing cooperatives, news organizations, section 501(c)(6) organizations, and Economic Injury Disaster Loan (“EIDL”) recipients.

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What are the financial loss requirements?

Businesses need to show at least a 25% reduction in gross receipts in the first, second, or third quarter of 2020 compared to the same quarter in 2019.

New businesses must demonstrate at least a 25% percent drop in revenues from the fourth quarter of 2019 to the same period this year. For a business started this year, the drop in revenue must be 30%.

Since this new PPP program is an amendment to the original, businesses that haven’t previously applied for PPP loans will be subject to the PPP program’s original eligibility rules.

The original PPP was generally open to businesses with up to 500 employees, but unlike this second loan offer, there was no requirement to demonstrate a revenue loss.
Eligible organizations can only receive one primary and one secondary PPP loan.

Amounts available

The maximum for “second draw” PPP loans is $2 million, less than the $10 million cap for PPP’s first round. As was the case with the original PPP, actual loan amounts will be based on an applicant’s payroll.

Second-time PPP borrowers will generally be eligible to borrow an amount equal to 2.5 times their average monthly payroll costs.

Those seeking PPP loans from the food service and accommodation industries – hotels, restaurants etc. – that are businesses classified under the North American Industry Classification System (NAICS) beginning with the number 72 are eligible for loans that amount to 3.5 times their average monthly payroll.

Forgiveness

Borrowers are still required to spend at least 60% of the funds on payroll over a covered period of either 8 or 24 weeks to receive full forgiveness. The other 40% may be used on eligible costs, including certain mortgage expenses, rent and utility payments.

Under the renewed program, the list of eligible non-payroll expenses has been expanded to include four new categories:

  • Costs for personal protective equipment and more that help a PPP loan recipient comply with federal and/or health and safety guidelines related to COVID-19
  • Software, cloud computing, human resources, and accounting needs
  • Any spending not covered by insurance that are related to property damage due to public disturbances that occurred during 2020
  • Spending to suppliers that covered costs essential to the business operations at the time the outlay occurred. For instance, restaurants’ purchases of perishable goods can now qualify.

Tax changes

Forgiven PPP loans will be completely tax-free, and any usually-tax-deductible business expenses that are paid for with PPP loans will also continue to be deductible.

The Consolidated Appropriations Act, 2021 (CAA 2021), H.R. 133, Division N, Section 276, provides that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other assets will not be reduced as a result of the loan forgiveness.

One other major change in the bill concerns how PPP loans interact with the Employee Retention Tax Credit (ERTC). Originally, businesses that took out PPP loans were prohibited from using the ERTC to reduce their tax burden and vice versa. This has been changed so businesses can take advantage of both in 2020 and 2021.

Best practices

If you have an accountant or bookkeeper, work with them to determine the amount you need going into 2021.

To help calculate payroll, look to your payroll provider. Here’s information about how your provider can help: Paycheck Protection Program Loan Payroll Calculation: Your Payroll Processor Can Help.

Gather the requested documents and keep digitized and organized for a smooth application process.

Let SmartBiz Loans® help you get ready for the new round of the Paycheck Protection Program (PPP) just approved by Congress*. While the SBA prepares to accept applications, we’ve put together a Prep List of the documents you’ll need for your PPP loan application. Download the Prep List and we’ll alert you when it’s time to begin your PPP loan application with us.

SmartBiz® works with small business owners like you every day to help you apply for the funding you need. Since 2013, we’ve specialized in SBA (Small Business Administration) loans. The new round of the Continuing Paycheck Protection Program Act, to be administered by the SBA, makes continued financial support available to help eligible small businesses keep their employees and stay open safely during the COVID-19 pandemic.

Sign up here to download the SmartBiz Loans PPP Prep List.

* The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial professionals, and the applicable SBA rules, for further information. The availability of PPP loans remains subject to SBA guidance, including the amount of funding available to banks and the quantity of eligible applicants considered on a first-come, first-served basis. Uses of funds are subject to change when the bill is passed.

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