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    By: Russell Marcus

    On March 27, 2020, President Donald J. Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In addition to the $350 billion appropriated to the Small Business Administration’s (SBA) Section 7(a) loan program through the new Paycheck Protection Program (PPP), the CARES Act added $10 billion to the Economic Injury Disaster Loan (EIDL) program.

    The EIDL program is an attractive loan option for certain small businesses. Those small businesses that have lower allowable payroll expenses (including as a result of a significant percentage of employees making in excess of $100,000 or the extensive use of independent contractors) may benefit from the EIDL program as an alternative to, or in conjunction with, the PPP. In addition, EIDL loans are an appealing option for small businesses that want to take advantage of the broader permissible use of funds under the EIDL program than under the PPP. However, the EIDL program has two significant disadvantages compared to the PPP—loans are not forgivable and the program does not have the same exemptions from the affiliation rules.

    EIDL loans of up to $2 million are available to any business, cooperative, employee stock ownership plan or tribal business concern with not more than 500 employees. Applicants may use funds to provide paid sick leave to employees who are unable to work due to COVID-19, maintain payroll, meet increased costs due to supply chain disruption, make rent or mortgage payments or repay obligations that cannot be satisfied due to revenue losses.

    Importantly, through December 31, 2020, an applicant may request an emergency advance of up to $10,000. An applicant will not be required to repay any amounts of an advance provided even if the EIDL is denied. If the applicant applies under the PPP, the advance will be reduced from the loan forgiveness amount under the PPP.

    A small business may apply for an EIDL loan as well as a PPP loan. However, a borrower must use the proceeds from an EIDL loan for purposes other than the allowable use of proceeds under the PPP.

    The chart below compares the principal terms of the EIDL program and the PPP.

     

    EIDL Program

    PPP

    Application/Approval
    • Approval by SBA based on credit and financial need
    • Loan fees, requirement to show need and one-year of operations waived
    • Approval by SBA-approved lender
    • Loan fees, requirement to show need and one-year of operations waived
    Maximum Loan Amount


    $2 million (based on credit and economic injury determination)

    Lesser of 2.5 months of payroll cost [1] and $10 million
    Term


    Up to 30 years


    2 years

    Interest Rate


    For-profit-3.75%
    Non-profit-2.75%


    1.00%

    Repayment Deferral


    Deferral of principal and interest payments until 2021


    Six month to one year deferral of principal and interest payments

    Prepayment


    No prepayment penalty


    No prepayment penalty

    Personal Guarantee


    Personal guaranty for loans in excess of $200,000 by owners of greater than 20%


    No personal guarantee

    Collateral


    Required for loans in excess of $25,000


    None

    Eligible Applicants
    • All SBA qualified small businesses (no more than 500 employees or otherwise meeting the SBA size standards)
    • Private nonprofit organizations (no more than 500 employees)
    • ESOPs (no more than 500 employees)
    • Sole proprietorships
    • Tribal businesses (no more than 500 employees)
    • Independent contractors (no more than 500 employees)
    • All small businesses in operation as of 2/15/20 with no more than 500 employees or otherwise meeting the SBA size standards
    • All SBA qualified small businesses
    • Accommodations and Food Service businesses with not more than 500 employees per location
    • 501(c)(19) veteran groups, 501(c)(3)s, and tribal businesses with not more than 500 employees
    • Sole proprietorships
    • Self-employed individuals
    • Independent contractors (no more than 500 employees)
    Use of Funds


    Payroll costs, group healthcare benefits, rent, utilities, mortgage interest, interest on other debt, working capital, inventory, equipment purchases, real estate payments and other operating expenses


    Payroll costs, group healthcare benefits, rent, utilities, mortgage interest and interest on other debt

    Loan Forgiveness/Grants


    Up to $10,000 in emergency grants that do not have to be repaid if the loan application is denied (but this amount will be deducted from any PPP loan forgiveness)


    Forgiveness of the portion of the loan used during the eight- week period after the PPP loan is originated to the extent that such proceeds are used for payroll costs, payment of

    interest on pre-existing mortgage obligations (secured by real or personal property), covered rent
    obligations and utility payments that were in place prior to February 15, 2020).[2]

    Application Period


    Until 12/31/20


    Until 6/30/20

    [1] Payroll costs include salary, wages, commissions or tips (limited to $100,000 on an annualized basis for each employee), employee benefits (including costs for vacation, parental, family, medical or sick leave), allowance for separation or dismissal, payments required for the provision of group health care benefits (including insurance premiums), payment of any retirement benefit and state and local taxes assessed on compensation. For a sole proprietor or individual independent contractor payroll costs include wages, commissions, income or net earnings from self-employment (limited to $100,000 on an annualized basis for each employee).

    [2] The forgiven amount may not exceed the loan principal and will be reduced proportionally by any reduction in employees or 25% reduction in payroll on June 30, 2020 compared to pre-February 15, 2020 levels. In addition, at least 75% of the forgiven amount must be spent on payroll costs. 


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