Note: This article reflects the latest changes from the PPP Flexibility Act, which was signed into law on June 4, 2020.
The SBA has two loan programs to help small businesses impacted by COVID-19: Economic Injury Disaster Loans (EIDLs) and the Paycheck Protection Program (PPP). If your business is eligible, you can get both of these loans and use the funds at the same time, as long as you don’t use them for the same purpose.
In this article, we’ll walk you how these two programs can be used together.
Further reading: The Difference Between PPP and EIDL
What you can use the EIDL for
The definition of permitted use of EIDL funds is broad. They can be used for financial obligations and operating expenses that could have been met had the disaster not occurred.
What you can use the PPP for
For PPP loans, the definition of permitted use is much narrower—to be eligible for forgiveness, at least 60% of the loan must be used to fund payroll and employee benefit costs. The remaining 40% must be spent on mortgage interest payments, rent, and utilities.
The PPP application will ask you to certify that you’re using the funds for payroll and utilities/rent/mortgage interest. If you spend the funds on something outside of those categories, you could be charged for fraud.
If you spend the funds on the right things but not the right ratio (eg. you spend 60% of the funds on rent and 40% on payroll), you’ll be charged 1% interest on the funds outside of the ratio range. Unforgivable loan expenses are treated like a 5-year SBA loan—but again, “unforgivable” in this case means it’s still in the right categories, just not in the right 60/40 ratio of payroll to utilities/rent/mortgage interest.
Keep in mind there are a few other stipulations for loan forgiveness as well, such as maintaining your headcount numbers, and keeping pay rates the same.
Further reading: PPP Loan Forgiveness (A Complete Guide)
Using a PPP loan to refinance EIDL
So what happens if you get an EIDL and later apply for a PPP loan? In that case, you may need to refinance the EIDL loan with the PPP loan. Essentially, you’ll get a bigger PPP loan and use part of it to pay off your outstanding EIDL.
If the EIDL was not used for payroll costs, it doesn’t have any impact on your PPP loan. However, if you took out an EIDL before April 3, 2020, and used it for payroll expenses, you must refinance the EIDL by carrying over the EIDL balance into your PPP loan.
Let’s look at an example of how that works. To calculate your maximum PPP loan, you take:
The lesser of $10 million, or 2.5 times a business’s average total monthly payroll amount for calendar year 2019
Plus the outstanding amount of any EIDL loan made between January 31, 2020, and April 3, 2020
Minus any EIDL advance you received
Say Yami Yoga Studio’s average monthly payroll for the PPP loan amount calculation is $10,000 per month. At 2.5 times their payroll, the maximum loan amount would be $25,000. However, the business also received an EIDL in March of 2020, which has a balance of $15,000. The company could get a $40,000 PPP loan—that’s $25,000 plus $15,000 to pay off the existing EIDL—which is sent directly to the SBA.
When it comes time for Yami Yoga Studio to apply for forgiveness, the company needs to document how it used the proceeds of both loans in calculating the 60/40 percent ratio.
For example, say the company used $10,000 of the $15,000 EIDL to pay salaries of employees and the other $5,000 on rent and utilities.
With the remaining $25,000, Yami Yoga Studio will need to spend at least $14,000 on payroll costs to reach the 60% threshold. The remaining $11,000 can be spent on other eligible expenses. Here’s a better look at the math:
|Loan amount||Payroll (60%)||Other eligible costs (40%)|
|PPP loan - $40,000||$24,000||$16,000|
|Less use of EIDL loan - $15,000||(10,000)||(5,000)|
|Remaining PPP loan proceeds||14,000||11,000|
PPP loan and EIDL advance
The EIDL allows small business owners to request an advance of up to $10,000. While the SBA refers to this as an advance, it doesn’t have to be repaid, even if your EIDL application is ultimately rejected. The advance can be used for maintaining payroll, proving sick leave to employees, rent or mortgage payments, and other obligations.
If you receive an EIDL advance and a PPP loan, proceeds from the advance will be deducted from the loan forgiveness amount.
To illustrate, let’s modify our example from earlier. Say Yami Yoga Studio gets a $25,000 PPP loan, then later receives a $5,000 EIDL advance. The amount of the advance would be deducted from the forgivable amount of the PPP loan. So even if the company follows all of the loan forgiveness rules, the most that can be forgiven is $20,000. You would need to repay the remaining $5,000 to your lender.
A common question is how to calculate the 60/40 percent split. Is it based on the original PPP loan amount of $25,000? Or the forgivable amount of $20,000? And would you have to pay the 1% interest rate on the remaining $5,000?
Currently, the forgivable amount scales with your payroll costs. While the forgiveness application has not yet been updated to reflect the newest bill, your payroll costs will likely be divided by 0.60 to determine your maximum forgivable amount. The more you spend on payroll, the more you can ultimately get forgiven. The SBA and the U.S. Treasury are still working on rules for calculating forgiveness, and this may change as further guidance is issued.
Because many small businesses are running into problems meeting that threshold, even with the best intentions, the newest PPP bill has reduced the original 75/25 rule to the current 60/40 requirement, and extended the amount of time businesses have to fully spend the funding.
Still, remember that this is a “payroll protection” program, not a small business protection program. The intention of Congress in creating the PPP was to keep U.S. workers employed. For that reason, small business owners should make an effort to meet the 60% threshold—especially if they want a portion of the loan to be forgiven.