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In 2020, the Small Business Administration (SBA) released two loan programs to help with economic complications during COVID 19: the Paycheck Protection Program (PPP) and the Emergency Injury Disaster Loan program (EDIL). The PPP & EIDL loans are two separate programs, but they can be combined to provide more financial help.
The Purpose of EIDL
The EIDL is specifically for people whose businesses have been affected by natural disasters. The money from this loan can be used for most business-related costs, like operation expenses, bills, and financial obligations.
The Purpose of PPP
The PPP loan is much different and has much stricter requirements. Business owners are required to use at least 60% of their loan to pay employees and fund payroll costs. Excess money can be used to pay leasing costs like rent or mortgage. If the funds are allocated in a different (for example, 50% is used on payroll and the other 50% is used on rent) SBA will charge an additional 1% interest rate based on the ratio range.
This loan is straight to the point. The loan will clarify that the applicant understands where the money will be allocated. Spending the money on a non-permitted use could cost business fraud charges.
Using PPP to help with EIDL
Some people apply for an EIDL and later apply for the PPP. This is not an issue, as some of the PPP money can be allocated to the EIDL loan. The PPP can be used to cover outstanding costs on the EIDL. If the EIDL money was not used for the permitted use of the PPP– payroll and rent– then it doesn’t have any effect on the PPP. Applicants can discover how much of their PPP they can use to refinance their EIDL by subtracting the EIDL advance from the business’s average monthly payroll cost over a 12-month time period.
The Effect of EIDL Advance on the PPP
Those who applied for the EIDL program before July 15, 2020, should have received a maximum loan advance of up to $10,000 based on how many employees they have which is $1,0000 per employee. The amount of the advance can be subtracted from the forgivable PPP costs so the business owner does not owe as much money as originally intended. The forgivable amount only refers to payroll costs, and not rent costs.
The Importance of Bookkeeping
People who have qualified for these loans should remember to keep a log of all these expenses. These will be required to keep their loans and ensure they are not charged for fraud. Some of these costs may even be forgiven. The PPP & EIDL loans make running a small business simpler during the pandemic.
Alternative Financing Options
The PPP & EIDL loans have disbursed billions of dollars to businesses impacted by the coronavirus pandemic. For many business owners, both programs offer enticing low-interest, long term and potentially forgivable loans that can be a critical lifeline. However, not everyone is taking advantage of the program due to its tight restrictions on the use of funds, government oversight with record-keeping requirements, or the overall lengthy and frustrating process.
The PPP and EIDL can help do a lot of things, but it’s not the perfect financing option for every small business in the U.S. right now. If these programs aren’t the right solution for your business, there are other financing options to explore with AMP Advance such as a Business Line of Credit; which allows you to use funds however you want without any inconvenience of required record keeping.
Not everyone will qualify for a PPP loan or EIDL loan, in that case, we suggest that you look at other funding options such as a merchant cash advance or any one of our many loan options.