SBA Emergency Loans: Paycheck Protection Program vs. Disaster Loans
This excerpt was originally published in full on ScaleFactor’s blog.
Graphics by Lin Zagorski Latimer.
With the passage of the CARES Act, the small business world has been buzzing with news of $350 billion set aside for SBA loans. If your business is in need of help to get through the coronavirus crisis, these loans may be a great option for you. But before you head to the Small Business Administration (SBA) website and start filling out forms, know that there are two primary loans available:
The Paycheck Protection Program loans pull from the $350 billion set aside in the CARES Act and are an incentive to keep workers on your payroll. The Economic Injury Disaster Loans are not part of the recent bill but are still an option for businesses that have been hit hard by the coronavirus pandemic.
We’re breaking down everything you need to know about these two options so that you can apply for the loans you need to keep your business going.
The Paycheck Protection Program
The Paycheck Protection Program is part of the stimulus bill that was passed on March 27, 2020 (the same bill that includes plans to send Americans checks for up to $1,200). This bill sets aside an additional $350 billion in funding that the SBA can distribute to small businesses that need immediate help. Interested businesses can begin applying April 3, 2020.
Unlike a disaster relief loan, which we’ll go into in more detail on shortly, these loans have a very specific use: to protect your workers’ paychecks.
The way that this bill incentivizes employers to keep workers on the payroll is through loan forgiveness. If you can prove that you spent the funds on payroll or other essential expenses, like rent or utilities, portions or all of the loan may be forgiven. The loan amount will also be based on your average monthly payroll expenses.
The SBA distributes other loans through its 7(a) loan program. Paycheck Protection Program (PPP) loans technically fall under that program, meaning that you can apply for the loan through any lender that participates. But, if you’re familiar with the terms of 7(a) loans, PPP loans stray from those terms in a few ways.
How Are PPP Loans Different from Standard 7(a) Loans?
The SBA guarantees 100% of Paycheck Protection Program loans. Standard 7(a) loans that are under $150,000 are guaranteed to 85%, while any loans over that amount are guaranteed to 75%.
PPP loans are available to any business with fewer than 500 employees, including contractors and sole proprietors. Standard 7(a) loans usually have revenue requirements as well to restrict lending to what it considers small businesses.
PPP waives the traditional fees of the standard 7(a) loan.
PPP loans don’t require a personal guarantee or collateral.
PPP loans can be forgiven, depending on how the funds are spent.
Economic Injury Disaster Loans
Disaster loans are always offered by the SBA and are not a part of the recent legislation. Historically, disaster loans are often employed after devastating weather events. Once a local or state government declares a region a “disaster zone” businesses in that region are eligible to apply for funds.
In the case of the COVID-19 outbreak, any business across the country that has been negatively impacted by the virus is considered eligible for disaster relief.
Typically, these loans are cumbersome to apply for, since you need to quantify the damage done to your business as a result of the disaster. The SBA has released a streamlined application process for disaster loan advances, but businesses going this route should be prepared with financial statements and past tax returns.
Can I Apply for Both Loans?
The short answer is: yes. Businesses that have already applied to Disaster Loans can also apply for a Paycheck Protection Program loan. However, businesses cannot apply for both loans if they are for the same purpose and amount.
This is a special case due to the COVID-19 crisis. Traditionally, you would not be able to receive multiple loans from the SBA.
How to Apply for a PPP Loan
If you’re ready to apply for a Paycheck Protection Program loan, the first step is to find a participating lender. If you have worked with a lender before, start there and ask if they’re qualified to help. (In other words, that they are authorized to make 7(a) loans.) If not, here’s a list of participating lenders provided by the SBA.
When you speak to that lender and begin to fill out your application, you’ll be asked for two metrics that will help calculate how much you’re eligible for:
Average monthly payroll. This can be found through your payroll provider or by reviewing your accounting file for past payroll expenses. For businesses that were operating in 2019, you should average your monthly payroll expenses for the full year. For those that weren’t operating, you can average your payroll costs for the first two months of 2020.
Please Note: Your calculation must exclude salaries over $100,000. Seasonal businesses are also allowed to calculate average payroll costs between February 15 – June 30, 2019, instead of the full year.
Number of jobs. This should include all full-time and part-time employees.
Please Note: The SBA has issued new guidance on the loans that says contractors and freelancers you employ should not be counted toward your average payroll expenses or the number of jobs. Those workers are eligible to apply for this loan individually to compensate for lost income.
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