Breaking Down the COVID-19 Loan Programs: Economic Injury Disaster Loan versus Paycheck Protection Program

On March 25, 2020, Governor Greg Abbott announced that the Small Business Administration (“SBA”) had included the state of Texas in its Economic Injury Disaster Declaration, thereby paving the way for small businesses to access the SBA’s Economic Injury Disaster Loan (“EIDL”) Program. The EIDL program has been around for a while, but was only recently expanded to include the coronavirus pandemic as a covered disaster. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.[i] The CARES Act introduces the Paycheck Protection Program (“PPP”) with $349 billion of federally guaranteed loans to support small businesses. The PPP is essentially a modified version of the SBA’s existing 7(a) loan program. The CARES Act also expands the EIDL program with $10 billion of additional funding for the SBA, including a very attractive $10,000 cash advance for applicants. Many small business owners facing COVID-19-related economic hardship should strongly consider these programs as a means to assist their working capital obligations.

What is the CARES Act?

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is the largest emergency stimulus package in U.S. history. Among its many provisions, the CARES Act allocates substantial aid for small businesses, including $349 billion of federally guaranteed loans. Notably, there are three provisions with the greatest potential impact for small businesses: (1) the Paycheck Protection Program (PPP); Emergency EIDL Grants, which expands the SBA’s EIDLs; and (3) the Small Business Debt Relief program. This article addresses PPP and the EIDLs because these programs potentially offer the greatest relief for small businesses in the short- and long-term.

The Paycheck Protection Program (“PPP”)

PPP loans are 100% federally guaranteed loans available to small businesses to address working capital needs. Eligible applicants include businesses with 500 or fewer employees; self-employed, sole proprietors, freelance and gig economy workers in operation before February 15, 2020; Accommodation and Food Service businesses with more than 500 employees over multiple locations but with 500 or fewer employees per location; and nonprofit organizations.

It is important to note that the CARES Act provides a limited waiver of the SBA’s affiliation rules for determining eligibility in the PPP program.  In other words, businesses that are exempt from the SBA’s affiliation rules include those in the hotel and food services industries, franchises in the SBA Franchise Directory, or businesses that receive financial assistance from a licensed Small Business Investment Company. Otherwise, the SBA affiliation rules aggregate the number of an applicant’s full-time and part-time employees with those of their domestic and foreign affiliates.[ii] This may be problematic for businesses backed by venture capital or private equity funding if those investors maintain a threshold level of control over the applicant business.

On March 31, 2020, the SBA released its guidance related to the PPP. The SBA confirmed that loans are made for two years at a 0.50% fixed rate with payments deferred for six months. Unlike typical SBA loans, there is no requirement for a personal guarantee or collateral, and borrowers need not show that credit is unavailable elsewhere.

PPP loans can be for up to two months of average monthly payroll costs from the last year plus an additional 25% of that amount, subject to a $10 million cap. Note that there will be some variation in the formula for the actual PPP loan amount depending on the dates the business was in existence.

Eligible businesses may use PPP loan proceeds for:

  • Payroll costs;
  • Interest payments on any mortgage obligation (excluding prepayment of or payment of principal on a mortgage obligation);
  • Rent (including rent under a lease agreement);
  • Utilities; and
  • Interest on any other debt obligations that were incurred before February 15, 2020.

“Payroll costs” are broadly defined to include: salary, wage, commission or tips (capped at $100,000 on an annualized basis for each employee); vacation and sick leave pay; severance pay; and payments for group healthcare benefits, retirement benefits, and state and local taxes assessed on employee compensation (prorated for the covered period); and total payments of any compensation to a sole proprietor or independent contractor that is a self-employment wage that does not exceed $100,000 in one year prorated for the covered period. Covered period means February 15, 2020 to June 30, 2020.

Payroll costs do not include an employee’s compensation exceeding $100,000 annual salary, as prorated over the covered period, income tax withholding for wages, any compensation for any employee whose principal residence is not in the United States, and qualified sick leave wages or qualified family leave wages for which a credited is not allowed under the Families First Coronavirus Response Act.

Unique to PPP is a potential loan forgiveness plan. A business may be eligible for loan forgiveness for the first 8 weeks of the loan if the money is spent on operating expenses—rent, payroll costs, mortgage interest, and utilities (not to exceed the principal of the loan). However, the loan forgiveness amount will be reduced if businesses do not maintain the same average number of employees for the first 8 week period beginning on the origination date as they did from February 15, 2019 to June 30, 2019 or from January 1, 2020 until February 15, 2020. Additional reductions will ensue if a business cuts compensation for employees making under $100,000 by more than 25% as compared to the most recent quarter.  However, a business can avoid these penalties if it reinstates its workforce count and wages by June 30, 2020.

One consideration for the PPP is that companies must have been in business as of February 15, 2020, and paying salaries and payroll taxes. Payments to independent contractors may also suffice.

Another consideration is that any amounts forgiven under the PPP will not count as income for tax purposes. But taking advantage of the PPP loan forgiveness program may disqualify a business from the payroll tax deferral benefit under the CARES Act. Furthermore, the Employer Retention Credit under the CARES Act is not available to businesses that receive a PPP loan.

Also, businesses must apply for a PPP loan through their local lending institution, not the SBA. So businesses may want to open an account with a local lending institution, and pay their expenses with the loan proceeds from this account to facilitate a clear audit trail for loan forgiveness reasons.

Lastly, as part of the application, businesses must certify in good faith that:

  • Current economic uncertainty makes the loan necessary to support your ongoing operations;
  • The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments;
  • You have not and will not receive another loan under this program;
  • You will provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks after getting this loan; and
  • Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities.

Economic Injury Disaster Loan (“EIDL”) Program

The EIDL program helps pandemic-stricken small businesses and non-profit organizations by offering fixed-interest rate loans for working capital purposes.  Notably, the COVID-19 pandemic is the first time in which EIDLs have been used for non-physical disaster purposes. In the past, property owners relied on EIDLs after major natural disasters (e.g., Hurricane Sandy and Hurricane Harvey).

The CARES Act expands the EIDL program by relaxing the eligibility requirements and increasing the amount of funding available through December 31, 2020. Specifically, small businesses may apply for an EIDL loan of up to $2 million. Unlike PPP, EIDLs are not forgivable.

Similar to PPP loans, EIDLs may be used for:

  • Fixed debts (mortgage, rent, etc.);
  • Payroll;
  • Accounts payable;
  • Sick leave to employees unable to work due to direct effect of COVID-19;
  • Meeting increased costs to obtain materials unavailable because of supply chain issues; and
  • Repaying certain obligations that cannot be met due to revenue losses.

Eligible applicants include small businesses with 500 or fewer employees; private non-profit organizations; small agricultural cooperatives; sole proprietorships, with or without employees, and independent contractors; and tribal businesses, cooperatives, and employee stock ownership plans with no more than 500 employees. Any business applying for an EIDL loan must have been in business as of January 31, 2020 and certify that it has suffered a substantial economic injury because of COVID-19.

The CARES Act modifies the EIDL program by waiving the personal guarantee requirement for loans less than $200,000. Businesses also need not prove they have been in operation for a year before COVID-19. Nor do businesses have to establish they cannot obtain credit elsewhere.

EIDLs are offered to small businesses with an interest rate of 3.75%, and 2.75% for nonprofit organizations. Payments may be deferred for up to one year. Businesses may also be eligible to receive $500,000 in loan proceeds for the first six-month term.  But repayment terms are ultimately determined on a case-by-case basis, so some, but not all, businesses can expect to repay an EIDL over thirty years.

Emergency EIDL Grants (“EIDL Grants”)

The CARES Act also expands the reach of EIDLs by appropriating $10 billion for EIDL Grants. EIDL Grants are $10,000 cash advances for businesses that apply for an EIDL loan, which shall be paid within three days of application. A business may use this advance for the same purposes as EIDL Loans. However, a business is not required to repay the EIDL Grant, even if the business’s application for an EIDL Loan is ultimately denied. EIDL Grants are available from January 31, 2020 to December 31, 2020.

Key Consideration: Avoid Duplication of the Loan Proceeds

One of the key considerations when assessing these programs is that there is no duplication of the loans. During Hurricane Sandy, many homeowners obtained SBA loans only to later find out they were ineligible for grant money.  The CARES Act calls for a similar interplay—borrowers that receive an EIDL for COVID-19 reasons cannot also receive a PPP for the same purpose. So borrowers can get loans under both programs, but they must be for different purposes. Borrowers may also refinance their EIDL into a PPP assuming they meet the eligibility requirements. If a borrower received an EIDL Grant and is later approved for a PPP, any amount advanced will be subtracted from the total amount forgiven.

Key Consideration: Businesses with Equity Investment

One of the biggest obstacles businesses may face concerns the SBA’s affiliation rules. As mentioned, the SBA uses these rules to determine whether an entity qualifies as a small business. The SBA will consider a business’s receipts, employees, and domestic and foreign affiliates. The latter factors (domestic and foreign affiliates) create the most confusion because many businesses may have investors that have backed many other companies. Businesses could be required to count all of the employees at their investors’ other backed-companies, which could easily cause the applicant business to breach the threshold employee limit.

Next Steps

Businesses considering applying for one of these loans should start by determining their eligibility and preparing their loan documents. Businesses should be mindful that there is a cap to the amount of funding available, so time is of the essence in completing applications.

For more information, please contact Andrew Scott at or 817.877.2802.

[i] H.R. 748, 116th Cong. (2nd Sess. 2020).

[ii] 13 CFR § 121.103(a).