Update, 1/8/21: As part of a larger relief package, Congress has approved $284.5 billion in new Paycheck Protection Program funding. The types of businesses and industries that are eligible for PPP loans have been expanded under the new bill. Additionally, businesses that can demonstrate at least 25% reduction in gross receipts year over year and meet other requirements may be eligible for a second PPP loan.
The new PPP round opens on Jan. 11, with exclusive access for first-draw loans issued by community financial institutions (CFIs) focused on underserved communities. On Jan. 13, CFIs will start offering second-draw PPP loans to qualified applicants. All other lenders will be able to submit applications later in the week.
PPP vs. EIDL vs. 7(a) Loan Overview
In the best of times, a small business loan is used to help a growing venture expand or pursue new opportunities. Occasionally, business owners use loans to meet short-term needs, such as covering a cash flow gap. But the entire small business financing world has shifted due to the coronavirus pandemic—now, businesses are mainly seeking federal funding through various programs to help them stay alive over the next few weeks and months.
A collection of small business loan programs have either been created or given additional funding to provide business owners the financial support they need to maintain payroll, pay bills, recoup lost income, and stay on track for long-term success. Options include the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan program, and the SBA’s 7(a) loan program.
All three programs are administered by the Small Business Administration in various ways. While the PPP was created specifically to address this crisis, the EIDL and 7(a) program existed prior to the coronavirus outbreak, and will continue to be available to small business owners in the years to come.
That being said, which loan program is best for your business right now? What are the terms and conditions of each? And can you apply for more than one? We’ll go over the specifics of each loan program, and compare PPP, EIDL, and 7(a) loans to each other below.
Paycheck Protection Program Loans
The Paycheck Protection Program was created through the CARES Act, which was signed into law on March 27, 2020. Officially, the program became available to small business owners and sole proprietors on April 3, 2020, and extended to all self-employed workers and independent contractors on April 10, 2020.
The goal of the PPP is to give small businesses the capital needed to keep their employees on their payroll, as well as meet other financial obligations such as paying rent, mortgage interest, utilities, and addressing payments for existing debt (note that the last item is not eligible for loan forgiveness).
Though the SBA administers this program, borrowers must apply through SBA-accredited lenders, such as banks and credit unions.
Paycheck Protection Program Loan Terms
The terms of a PPP loan are as follows:
- Loan amounts up to $10 million
- Interest rate of 1%
- Maturity of 5 years (Note that this was previously 2 years, before the passage of the PPP Flexibility Act.)
- First payment deferred for six months
- 100% guaranteed by the federal government
- No collateral
- No personal guarantees
- No borrower or lender fees payable to SBA
Businesses can borrow 2.5x their average monthly payroll, with a maximum loan amount of $10 million. You’ll need to calculate your monthly payroll costs in order to determine your loan request.
Independent contractors, sole proprietors, and other self-employed workers can similarly borrow 2.5 times their average monthly net earnings from self-employment, up to $100,000.
Is a PPP Loan Forgivable?
Yes, under certain circumstances a PPP loan is forgivable. If a small business uses at least 60% of their loan proceeds to keep their staff on payroll (or rehires staff that was previously laid off due to the pandemic before June 30, 2020), and the other 40% or less on additional eligible costs like rent and utilities within 24 weeks after the loan is disbursed, the loan will be forgiven. (Note that these percentages and the time frame have been altered due to the PPP Flexibility Act.)
Whatever amount is not forgiven will need to be repaid according to the above-stated terms.
Economic Injury Disaster Loans
The Economic Injury Disaster Loan program is an existing SBA loan program that covers small business operating expenses after a declared disaster. In the case of the coronavirus outbreak, all U.S. states and territories have been declared disaster areas, which means businesses across the country are eligible to apply for an EIDL if they’ve been impacted by the novel coronavirus.
EIDLs can be used to pay fixed debts, payroll, accounts payable, and other bills. You cannot use EIDLs to replace lost sales or profits, or use it for business expansion.
The EIDL program received an additional $10 billion in funding through the CARES Act, in order to fund the immense loan volume as well as provide borrowers with a cash advance for immediate relief upon applying.
Unlike the PPP, you can apply for an EIDL directly with the SBA through their streamlined application process.
Economic Injury Disaster Loan Terms
The terms of EIDLs are as follows:
- Loan amounts up to $2 million
- Interest rate of 3.75% for small businesses, and 2.75% for nonprofits
- Maturity up to 30 years
- Payments deferred on the loan for up to one year
Keep in mind that due to the incredible demand for these loans, the SBA recently announced that they will cap EIDL loans at $15,000 per applicant for two months of working capital. This cap may ease as more funds become available through future legislation.
In addition, the cash advance that the SBA promised applicants will also be limited due to demand. The SBA capped the advance to $1,000 per employee, at a maximum of $10,000.
Is an EIDL Forgivable?
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.
SBA 7(a) Loans
The SBA’s 7(a) loan program is another existing loan program that is typically geared toward businesses seeking to cover working capital and expand, improve, or otherwise grow their business in prosperous times. Other uses include financing debt or a seasonal line of credit. The 7(a) program is the SBA’s most popular loan program due to its relatively low interest rates and wide range of eligible uses.
Similar to the PPP, borrowers apply for an SBA 7(a) loan through an SBA-accredited lender. The SBA partially guarantees this loan, up to 85%, to encourage banks to approve small businesses for the funds they need.
SBA 7(a) loans are continuing to fund during the coronavirus pandemic. If you have not been negatively impacted by the pandemic and are seeking low-cost financing, there are few options better for a small business than an SBA 7(a) loan.
That being said, while the coronavirus business loans are not stringent about the businesses meeting certain qualifications other than having been in business before pandemic hit the U.S., 7(a) loans typically require business owners to have a good credit score, to be able to show solid business revenue and profitability, an acceptable debt service coverage ratio, a business plan, and collateral.
SBA 7(a) Loan Terms
The exact terms of your 7(a) loan will depend on your business as well as your loan purpose, but general terms include:
- Loan maturity under 7 years:
- Under $25,000: Prime rate + 4.25%
- $25,000 to $50,000: Prime rate + 3.25%
- Over $50,000: Prime rate + 2.25%
- Loan maturity over 7 years:
- Under $25,000: Prime rate + 4.75%
- $25,000 to $50,000: Prime rate + 3.75%
- Over $50,000: Prime rate + 2.75%
- Repayment terms of up to 25 years for real estate, up to 10 years for equipment, up to seven years for working capital
- Fees including a guarantee fee, credit check fees, packaging fees, closing costs, and late payment and prepayment fees (for loans with terms of 15 years or greater, if you prepay within the first three years)
Is an SBA 7(a) Loan Forgivable?
SBA 7(a) loans are not forgivable. If you have an existing 7(a) loan (or other SBA loan) out with a lender, the CARES Act made funding available for the SBA to pay all principal, interest, and fees for six months for businesses impacted by the outbreak. Payment of your loan will resume later this year.
Deciding Between a PPP vs. EIDL vs. 7(a) Loan
If your business has been impacted by the coronavirus, the Paycheck Protection Program and Economic Injury Disaster Loan program are where you should begin your search for low-cost financing.
You can apply to both loan programs, as long as you don’t plan to use proceeds from both the PPP and EIDL to cover the same costs (in this case, payroll). You can also refinance your EIDL into a PPP loan if you’ve already taken out an EIDL.
In comparing the EIDL and PPP loans (as well as the additional payroll tax credits that businesses can take in lieu of the PPP loan), the PPP loan is best for businesses that want to maintain their payroll and keep workers paid until restrictions are eased and business picks up again. The EIDL may be better for smaller entities that don’t have outsized payroll costs and instead want to cover other costs such as accounts payable or existing debt.
If your business has been spared negative impact by the pandemic, an SBA 7(a) loan is an excellent choice if you’re looking to cover working capital or expand your business at rates that alternative lenders such as online lenders can’t offer.
At the end of the day, the impact of the pandemic on your business as well as your specific situation will dictate which loan product is right for you.