Economic Injury Disaster vs. Paycheck Protection Plan Loans During COVID-19: Exploring What’s Best for Your Practice

We recently summarized the key takeaways of the $2.1 Trillion ‘‘CARES Act’’ for small businesses and individuals and for retirement plans. The following article is the third installment in our initial three-part series about the act and is focused on what practices need to know about Economic Injury Disaster Loans (EIDL) and Paycheck Protection Plan (PPP) Loans.

In addition, we start to explore which loans may be preferable for different sized healthcare organizations. Of note, companies cannot apply for both EIDL and PPP loans under the CARES Act if it is for the same purpose.

Here is a high-level summary:

EIDL: WHAT YOU NEED TO KNOW

This program was already in existence and being administered by the Small Business Administration (SBA) prior to the COVID-19 outbreak. Since the SBA has officially declared the COVID-19 pandemic as a disaster, any small businesses affected by the disaster are eligible for low-interest loans.

Criteria for Loan Approval

• Credit History. Applicants must have a credit history acceptable to SBA.
• SBA must determine that the applicant business has the ability to repay the SBA loan.
• The applicant business must be physically located in a declared county and suffered working capital losses due to the declared disaster.
• Borrower meets the NAICS (North American Industry Classification System) maximum size requirements.

Borrowing Specifics

• Loans go up to $2 million.
• Interest rates are 3.75% for small businesses with terms up to 30 years.
• EIDL loans over $25,000 require collateral.
• SBA takes real estate as collateral when available.
• SBA will not decline a loan for lack of collateral, but requires borrowers to pledge what is available.

Use of Funds

Working capital loans may be used to pay fixed debts, payroll, accounts payable, and any other bills that could have been paid were it not for the disaster. Loans are not intended to replace lost sales, profits, or for expansions

How to Apply

Applicants apply directly to the SBA’s Disaster Assistance Program. A loan officer works with you to provide all the necessary information needed to reach a loan determination. The SBA’s goal is to arrive at a decision within 2-3 weeks. Once signed loan closing documents are received, initial disbursements should be made within 5 days.

Basic Filing Requirements

• Completed SBA loan application (SBA Form 5 or 5C)
• Tax Information Authorization (IRS Form 4506T) for applicant, principals, and affiliates
• Complete copies of most recent Federal Income Tax Return
• Schedule of Liabilities (SBA Form 2202)
• Personal Financial Statement (SBA Form 413)
• SBA form 1368 providing monthly sales figures
• Other information that may also be requested includes:
  • A complete copy of most recent federal income tax return for principals
  • A P&L and balance sheet for the 2019 tax year (if last year’s federal income tax filing not yet completed)
  • A current year-to-date P&L statement
  • A spreadsheet detailing:
    • All full-time employees with 8 weeks salary + payroll taxes
    • 2 months’ rent with copies of leases
    • 2 months’ mortgage interest with copy of loan payments
    • 2 months’ of utility costs with copy of utility payments

PPP LOANS: WHAT YOU NEED TO KNOW

For practices that employ fewer than 500 full-time-equivalent staff, we recommend pursuing a Paycheck Protection Plan loan under the CARES Act due to numerous advantages:

• PPP loans may potentially cover a larger amount (up to $10M).
• Loans are up to 100% forgivable if they are used for up to 8 weeks of payroll and other eligible business expenses, meeting headcount, and salary criterion.
• Loan payment deferral is available for 6-12 months.
• No collateral or guarantees are required.

However, there are still some steps that need to be taken by the SBA in order for these loans to be accessible for businesses.

When Will PPP Loans Become Available?

The SBA will begin accepting applications for PPP funds on April 3, 2020. We encourage practices to contact their preferred banking institution for application submission details. Practices can also access the application and information for borrowers via Treasury’s dedicated CARES Act website.

We’ll continue to monitor the specifications around these loan types as they evolve in the coming days. Please keep checking back for updates.

Please also reach out to me at ben.remke@curi.com or 919‑878‑7614 if you have any questions about EIDL or PPP loans and what’s best for your practice during the COVID-19 pandemic.

Please note:  This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. You should consult your financial advisor, attorney, or tax advisor with regard to your individual situation.