Like most small business owners across the globe, COVID-19, and its resulting economic lockdown, may be hurting your business. Beyond just damaging earnings, it could be putting your business at risk altogether. This is undoubtedly stressful—more so if you have employees on payroll to support. Here is where Small Business Administration’s (SBA) relief loans come into play.
Fortunately, for US-based small businesses, the government has provided access to low-rate (and in some cases, forgivable) business loans for the sake of business continuity. Though it’s important to know the details surrounding the loan, and the rules governing how it’s used to support your business before you spend the money.
Overview, SBA the CARES Act
In response to the COVID-19 crisis, the US government has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The law is designed to protect the US and US businesses from the economic ramifications of COVID-19. The CARES Act provided $367 billion in funding to the Small Business Administration (SBA) to be administered to small businesses through the Payment Protection Program and the Economic Injury Disaster Loan Program.
The EIDL, in particular, has existed for years and is designed to support any small businesses affected by a natural disaster (like earthquakes, tornadoes, or hurricanes). The CARES Act, however, expanded the scope of what the SBA and EIDL programs support, and is by far the largest endeavor undertaken by the SBA. The fact is, with numerous consumers out of work, quarantined in their homes, and restricted in their shopping habits, many small businesses lack the necessary capital to remain operational without an immediate revenue boost. The EIDL is provided specifically with the goal of keeping businesses open and employees on the payroll (the alternative being an even larger hit to the already stressed unemployment system).
Any US business with fewer than 500 employees that was operational as of January 31st, 2020 is now eligible to apply for relief loans. As of writing this overview, both PPP and EIDL loans are available, but there have been a slew of technical and administrative issues that have delayed or disqualified many businesses. In addition, a lack of immediately available funds from the CARES Act means that some loans have been temporarily restricted to agricultural businesses only.
Types of Loans (EIDL vs PPP vs Express)
Amounts
Interest Rates
Forgiveness Potential
Extended Purpose
Provided by
Other notes
EIDL
$25,000 to
$2 million
0% for 12 months
3.75% for small businesses
2.75% for non-profits
Yes for $10,000 advance
Working capital/business continuity
SBA directly through website
Monthly payments might be lower, but expect a lump sum payment at the end of 30 year term
You may have to provide personal assets for collateral, and you will need to check with SBA before making any major asset transactions (e.g., selling or buying a home)
PPP
2.5x average monthly payroll up to $10 million N/A Yes Payroll Expenses Local banks, backed by SBA At least 75% needs to be used for payroll for forgiveness eligibility and you can’t layoff employees Cannot receive PPP loan or forgiveness of PPP loan if you use EIDL for payroll
Express
$350,000 – $500,000
Low – varies by bank
No
Any business expenses
Local banks, backed by SBA
You may have to provide personal assets for collateral, and you will need to check with SBA before making any major asset transactions (e.g., selling or buying a home)
You can apply for EIDL loans here.
Purpose of SBA relief loans
Perhaps the easiest way to quickly understand how you can and cannot use EIDL loans for your business is to understand the intent of the loans in the first place. As mentioned above, the goal is business continuity that allows businesses to stay open and avoid layoffs. EIDL loans are for any bills, payments, or regular expenses needed to maintain day-to-day operations. The loans are not intended for additional business growth, new expansion/investment efforts, or the purchasing of fixed assets (such as real estate).
NOTE: Below we will outline some examples of how the CARES Act loans are intended to be used, but this article is by no means an authority on individual use cases for any specific business. To be safe, you should always consult with your certified public accountant (CPA) before moving forward with the loans.
How to use (and not use) SBA relief loans
Before spending any loan money it’s critical that you understand the rules governing how the money can be allocated. With a bit of research and the help of a CPA you won’t have to worry about incorrectly disbursing the loan. Failure to comply with the loan regulations can lead to serious penalties ranging from disqualification of loan forgiveness to prison time. Below are a few examples of how to use the loans, along with quotes from the SBA. It’s important to reiterate that you should seek the assistance of a financial specialist familiar with your business before making any final decisions.
Payroll Protection Program loans are the easiest to explain, because they are designed for exactly what their name implies – subsidizing the payroll for you and your employees. PPP loans actually have the potential for forgiveness (meaning you wouldn’t have to pay it back), but that’s dependent on you allocating at least 75% of the funds for payroll.
Note: You can use loans to pay yourself as a form of payroll, and to pay bonuses to employees if it’s a scheduled part of payroll. Funds cannot be used to pay bonuses to owners.
Economic Injury Disaster Loan Program loans are specifically designed for “working capital,” i.e. the things you need to keep your business sustained during payroll. A few examples include:
- • Payroll
- • Rent (if applicable)
- • Software/licenses
- • Insurance
- • Warehouse fees
- • Supplier payments (although you may not want to place new orders if you have stock)
- • Internet
- • Phones
Note: You should not “double dip.” If you have PPP for payroll, do not use EIDL funds for payroll. Using EIDL funds could disqualify you for PPP (or forgiveness of PPP if you have already been approved).
Ideally, with the loans provided, you can keep your business running through COVID-19 and be ready to resume regular operations as soon as the economy gains steam. It’s important not to misuse the loans. As a reminder, EIDL can not be used for things such as:
- • Loan refinancing
- • Owner pay (bonuses/dividends, etc)
- • Expansion opportunities
- • Acquisition of fixed assets (such as real estate, additional equipment, etc)
Additional tips
• Get help from your accountant! You should be consulting with a CPA before making any serious financial decisions with your SBA relief loans.
• Keep all receipts/records, and ensure any expense can be tied to your business specifically being impacted by the pandemic. There’s a good chance you won’t ever be asked for the info—but if you lack the records, there could be trouble when it’s time to repay/forgive the loan.
• You can use the EIDL loan to pay credit cards that have been used for business, but you will want to ensure that those cards have only ever been used for business and/or that you have very clear documentation highlighting how it was used for your business.
Additional resources
• The CARES Act
• SBA Relief Loans details
• Specific details for PPP loans
• Specific details for EIDL loans
• Business/financial counseling by location
The CARES Act could provide your business exactly what it needs to stop COVID-19 from putting an end to all of your hard work. With the PPP and advances on EIDL loans in particular, you may have an opportunity to support your business without having to pay anything back in the future. Make sure you understand how to administer the funds properly, so you don’t end up in a tough spot down the line. With a proper understanding of the loan process and the advice of an accountant, you won’t have to worry and can quickly ease stresses on your business.
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