CARES Act, PPP Loans and Economic Injury Disaster Loans: What Small Business Owners Need to Know

In March 2020, the United States government passed the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act. This new law is meant to provide economic relief to Americans and small businesses affected by the coronavirus (COVID-19) pandemic. For businesses, the CARES Act outlined several initiatives and funding programs designed to help businesses keep employees and pay monthly obligations. The CARES Act introduces a new small business relief program, called the Paycheck Protection Program, expands on existing Economic Injury Disaster Loans and designates a series of other relief initiatives. 

Which Small Business Relief Loan is Best For My Business?

Evaluating which relief loan might be best for your business depends on your industry and the effect that the COVID-19 pandemic has on your ability to keep your employees and meet your obligations. Here is a guide to what loan or relief program might be best for your business.

Paycheck Protection Program 

Apply for the Paycheck Protection Program loan if you want to use the funds to pay for, well, paychecks. With 8 weeks of loan forgiveness for payroll expenses, this loan can help you maintain your employee base and get you back up and running faster when social distancing requirements are lifted. Read FAQs about the Paycheck Protection Program and PPP loans below.

Economic Injury Disaster Loan (EIDL)

Applying for the Economic Injury Disaster Loan (EIDL) may be right for your business if you have experienced a devastating blow by the COVID-19 pandemic and do not have significant payroll costs. This loan may also be right for you if you have maxed out your PPP loan and need additional funding. Read FAQs about Economic Injury Disaster Loans below.

Other SBA Relief Programs

If you are experiencing a minor economic blow from the COVID-19 pandemic and would be well-positioned to weather the storm without additional cash, debt relief or tax relief may be the best option. The perk of these relief provisions is that you are not creating any additional obligations, just postponing payments. Read more about the new tax, counseling and debt relief programs below.

Paycheck Protection Program Loans

The Paycheck Protection Program (PPP) provides federal loans designed to help employers make payroll. The goal of these loans is two-fold: to keep workers employed and to help companies recover quickly once restrictions are lifted. PPP Loans are unique from other aid offerings because these loans are eligible for 8 weeks of payroll forgiveness, no SBA fees and no need to prove economic injury. 

Who is Eligible for a PPP Loan? 

Your business (or nonprofit organization) is eligible for a PPP loan if you were in business before February 15, 2020 and have less than 500 employees.

What is the Maximum PPP Loan Amount?

The maximum loan amount is $10 million, but business owners can only borrow their average monthly payroll costs times 2.5. If you have a seasonal business and an average of 12 months does not accurately represent your payroll costs from March to June 2020, you can instead calculate your average payroll costs from February 15 to June 30, 2019. 

What Costs are Eligible for Forgiveness with the Paycheck Protection Program?

One of the benefits of a PPP loan is that the federal government will forgive up to 8 weeks-worth of payroll costs. This includes employee salaries or hourly wages, as well as paid time off, family or medical leave, group health care benefits, retirement benefits and state or local tax on employee compensation.

What Are Other Eligible Uses of the PPP Loan?

While the PPP loan comes with some appealing forgiveness benefits, there are restrictions on how the loan money can be used. Rent, utilities, interest payments on your business mortgage or other debt obligations are all eligible uses of a PPP loan, but these expenses are not eligible for loan forgiveness.

Can I Apply For An Economic Injury Disaster Loan if I Get a PPP Loan?

Yes, business owners are eligible to apply for an Economic Injury Disaster Loan in addition to a PPP loan. However, the two loans cannot be used to cover the same expenses.

Where Can I Get a PPP Loan?

You can apply for a PPP loan with your bank, as long as your bank is eligible to offer SBA 7(a) loans. You can also apply for a PPP loan online with a non-bank lender.

Economic Injury Disaster Loans

The CARES Act expanded the Economic Injury Disaster Loan (EIDL) program to provide low-interest loans up to $2 million, as well as $10,000 advance grants. Any small business that has suffered significant economic injury due to COVID-19 is eligible to apply for an EIDL and the emergency advance grant. 

Who is Eligible for an EIDL?

In general, businesses with less than 500 employees and nonprofits are eligible to apply for an EIDL. Sole proprietorships, independent contractors, employee-owned businesses and tribal businesses are all eligible for these disaster loans.

How Can I Use an EIDL?

An EIDL can be used to cover any operating expenses that you are struggling to cover because of the coronavirus crisis. These expenses may include payroll, rent or other goods. These disaster loans cannot be used for new business expansion products.

What are Emergency Economic Injury Grants?

Emergency Economic Injury Grants are $10,000 advances that do not need to be repaid. According to the SBA, these grants can be available within three days to cover immediate business needs, such as payroll, sick leave or production needs. You cannot receive a grant without applying for an EIDL.

Who is Eligible for the Emergency Grant?

Any small business owner that was in business as of January 31, 2020 is eligible to request the emergency grant. You can request this grant when you apply for an EIDL anytime between January 31 and December 31, 2020. If you applied for an EIDL after January 31 but before the CARES Act was passed, you can request the emergency grant by contacting your lender.

How Can I Apply for an EIDL?

Small business owners can apply for an EIDL with their bank, with the SBA or through an alternative lender. However, it is important to understand EIDLs, so it is recommended that you consult a financial professional who can guide you through the process.

Other Government COVID-19 Relief for Small Businesses

The federal government is offering other debt relief and tax relief programs to help small businesses survive the COVID-19 pandemic. These programs help businesses by temporarily relieving some costs and providing guidance to business owners.

SBA Debt Relief

The SBA Debt Relief program will provide businesses with 7(a) loans, 504 loans, and microloans with temporary payment relief. Under this program, the SBA will cover all loan payments, including principal, interest, and fees for six months. Business owners can contact their loan provider to inquire about the debt relief program. In addition, if you apply for a new 7(a), 504 loan or microloan by September 2020, you are eligible for six months of debt relief.

Small Business Counseling

At this time, more than ever, small business owners need help in the form of guidance. The CARES Act allocates money to local Small Business Development Centers (SBDC), Women’s Business Centers (WBC) and SCORE mentorship chapters to provide this much-needed counseling and training. At these centers, counseling and training sessions are free to business owners.

Small Business Tax Relief

The CARES Act also provides some tax relief to small businesses whose operations are heavily impacted by government orders to suspend travel and group meetings, or whose gross receipts are less than 50% of the same quarter last year. This initiative provides a refundable payroll tax credit for 50% of wages paid by employers, up to $10,000 between March 13 and December 31, 2020. The CARES Act also allows employers to delay payroll tax payment, specifically the employer obligation of Social Security tax. However, these tax relief provisions do not apply to businesses who utilize the Paycheck Protection Program (PPP).

Every business has a unique situation and you should always consult your financial professional, loan provider or local SBA office before applying for a relief loan. In tough economic times, it is especially important to make good financial decisions for your business. 

bakery owners laughing together

Author:

Jeffrey Bumbales
Director, Marketing & Strategic Partnerships at Credibly