Deep Dive Q & A: COVID-19 Small Business Relief Loans

New loan options are now available to help small businesses mitigate the economic consequences of the COVID-19 pandemic. Here are some common questions and answers about these loans based on recently released information from the Small Business Administration (SBA) and the U.S. Treasury Department.

What types of disaster loans are currently available to small businesses?

There are two new loan programs, the Paycheck Protection Program and Economic Injury Disaster Loans.

As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Paycheck Protection Program (PPP) authorizes $349 billion in partially forgivable Section 7(a) SBA loans. These loans are issued by qualified SBA lenders and 100% guaranteed by the SBA.

The SBA’s Economic Injury Disaster Loan Program (EIDL) is a separate loan program passed in connection with the Families First Coronavirus Response Act.

Can I borrow money from both of these programs?

Yes. However, the funds from the loans need to be used for different purposes. For example, one loan could be used for payroll expenses and the other for rent or utilities. Businesses that are interested in receiving a loan should apply to both programs. Because of the strong demand for these loans, you should apply as soon as possible.

Can self-employed workers apply for these loans as well?

Yes, both self-employed contractors and small businesses can apply for the PPP and EIDL loans. These programs are available to small businesses and nonprofits with fewer than 500 employees, sole proprietors and independent contractors.

Can independent contractors be counted as part of my payroll expenses?

No. Because independent contractors can apply for the PPP on their own, they are unable to be counted as employees for the purpose of the PPP loan calculations. This was a recent change announced in the interim final rule.

Which loan program would be best for me?

If you are a small business that can offer personal guarantees or guaranteed collateral such as property or equipment, then both loan programs could be a fit. 

For EIDL loans, the SBA is currently waiving the required personal guarantees for loans up to $200,000. For loans over $200,000, a personal guarantee will be required. If you are not prepared to offer personal guarantees as collateral, then a PPP loan is likely a better choice because no personal guarantees or collateral are required.

How much money can I borrow?

Under the PPP, loan amounts will be 2.5 times average monthly payroll costs, up to $10 million. EIDL loans can be up to $2 million working capital for up to 30 years.

What are the terms of these loans?

The PPP caps interest at 4% and payments or principal and interest are deferred for 6 months. Loans will be forgiven in an amount equal to 8 weeks of payroll, mortgage, rent and utility expenses, with the amount of forgiveness reduced if employee headcount or compensation is decreased.

EIDL loans carry an interest rate of 3.75% for small businesses, and as much as $10,000 of the loan amount is forgivable. In addition, the SBA offers a loan advance of as much as $10,000 for eligible applicants.

How do I apply for the loans?

The EIDL application is available on the SBA website. A sample PPP loan application is also available from the SBA. Contact your lender to apply for a PPP loan.

What documentation will I need to apply?

For the PPP, you should gather:

• IRS forms 940, 941, or 944
• 2019 payroll reports (a list of eligible payroll expenses can be found here)
• 2020 interim financial statements (balance sheet, income statement, accounts receivable aging and accounts payable aging)
• IRS form 1099 for 2019 (if applying as an independent contractor)

Please note that this is not an exhaustive list, and the documentation required may vary by lender. If you have a pre-existing relationship with a bank, credit union, or authorized lender, check to see if they are an eligible PPP lender.

For an EIDL, you’ll need:

• Personal financial statements
• Statement of liabilities
• IRS form 4506-T
• 2019 tax return

Are there any downsides to applying for the loans?

No. If you think you might use the money, you should apply. There are no penalties or costs associated with applying. Also, you don’t necessarily have to use the funds if you are approved.

Where can I find more information?

The SBA and Chamber of Commerce have published detailed information about loans and other resources available to small businesses. You can also contact your local SBA approved lender to answer any questions you have.