Small business owner talking on the phone at her desk

How to Use Your SBA Coronavirus Loan

6 min read • Apr 11, 2020 • Derek Miller

The COVID-19 pandemic was the first time many small business owners ever thought about SBA loans. When Congress passed the CARES Act—a $2.2 trillion stimulus package for individuals and businesses—one of the main focuses was on expanding the resources and relief available to small businesses affected by COVID-19.

The CARES Act includes provisions to aid small businesses through existing financial programs like SBA Debt Relief and SBA Express Bridge Loans. It also includes funding for Economic Injury and Disaster Loans (EIDLs) and established a completely new SBA loan—the Paycheck Protection Program (PPP). 

PPP loans and EIDLs are the main SBA disaster loans that businesses are seeking under the CARES Act, and they can provide a necessary influx of cash for companies that have been shut down or limited by the coronavirus. These 2 SBA coronavirus loans are exceptionally flexible, but they do come with limits. 

Learn how you can use these 2 different loans to support your business and maximize their impact during our current crisis.

How Do PPP Loans Differ from Other SBA Loans?

The government offers multiple types of SBA loans, but most affected by COVID-19 will apply for a Paycheck Protection Program (PPP) loan. The CARES Act set aside $350 billion to fund PPP loans for small businesses. 

The goal of the Paycheck Protection Program is to keep people employed and receiving paychecks through the pandemic, so they make it much easier for businesses to get approved for this type of SBA loan.

There are several differences between PPP loans and a traditional SBA loan, including:

  • The maximum loan amount was raised from $5 million to $10 million for those who apply before June 30, 2020.
  • These loans are eligible to companies with 500 or fewer employees, regardless of whether or not they meet the SBA’s “small business standards.” 
  • It waives the requirement for businesses to prove that they can’t get credit elsewhere.
  • Annual fees and guarantees, along with prepayment penalties, are also waived. 
  • Businesses won’t need to provide a personal guarantee or collateral.
  • All or some of the principal loan amount may be waived if used for approved expenses.

How to Use PPP Loans

Paycheck Protection Program loans are unique in that they are specifically designed for payroll support and—if used properly—may be fully or partially forgiven. These SBA loans must be used over an 8-week period, at which time businesses will need to apply through their lender for forgiveness. 

Small businesses that receive a PPP loan should use it for:

  • Wages, commissions, and salaries: Use the funds to keep your employees on staff instead of cutting their hours, furloughing them, or laying them off. 
  • Family, medical, and sick leave: PPP loans can be used to cover paid time off (PTO) and insurance premiums for family, sick, or medical leave. 
  • Mortgage, rent, and utilities: Use a PPP loan to cover your rent and utility payments.
  • Interest payments on preexisting obligations: You can also use PPP loans to cover interest payments on your mortgage (not principal payments) or other debt obligations incurred before the covered period. 

How Do EIDLs Differ from Other SBA Loans?

The CARES Act also expands resources for more traditional SBA loans like the Economic Injury and Disaster Loan (EIDL). SBA EIDLs have a maximum term of 30 years and fixed rates of 3.75% for small businesses or 2.75% for nonprofits.

This SBA financial program is not new, but the government has bolstered the program to enable struggling businesses to receive immediate relief (within 3 days of the application) through a $10,000 loan advancement.

The goal of the EIDL program is to provide businesses significantly affected by the coronavirus pandemic with financial aid to help weather the storm. To be approved, organizations must show that COVID-19 is preventing them from earning enough revenue to pay its typical operating expenses and debt obligations. Businesses that were previously struggling may not qualify for EIDLs.

While the application process and structure of an EIDL are similar to other SBA loans like an SBA 7(a) loan, there are some differences, including:

  • Borrowers may be eligible even if they have not been in business for a year.
  • Borrowers do not need to show that they are unable to obtain credit elsewhere.
  • The loan amount cannot exceed $2 million.
  • Loans are eligible for businesses or nonprofits with 500 or fewer employees.
  • Personal guarantees for EIDLs under $200,000 are waived.
  • The $10,000 emergency loan advancement is paid while the borrower’s application is being reviewed and is not required to be repaid.

How to Use Economic Injury and Disaster Loan (EIDL)

Similar to a PPP loan, EIDLs are meant to be used for specific purposes. Businesses should use EIDLs like working capital to pay off long-term debts, fixed expenses, employee payroll, sick and family leave, accounts payable, inventory, and other relevant costs. These emergency loans shouldn’t be used to refinance debt, pay shareholder distribution, or satisfy tax penalties.   

EIDLs are low-interest loans with a maximum maturity of 30 years—determined by your lender. Visit the SBA’s website to learn more about applying for an EIDL.

SBA Coronavirus Loans Can Keep You Afloat

Thanks to the recently-enacted CARES Act, small businesses have even more incentive to seek financial assistance through an SBA loan. Not only can your business take advantage of SBA debt relief and bridge loan programs, but the new bill also adds provisions to the Economic Injury and Disaster Loan program (EIDL) and creates the Paycheck Protection Program (PPP).

PPP loans and EIDLs are the main SBA coronavirus loans that small businesses throughout the country will be considering. Their flexible requirements and favorable terms make these SBA loans incredible resources for businesses looking for financial relief during the coronavirus pandemic.

 

While every effort is made to ensure the accuracy of information when a story is published, the coronavirus pandemic and Paycheck Protection Program (PPP) have caused details to change at a rapid pace. Additional guidance from the government may change or clarify certain aspects of the forgiveness process and could result in changes to the information contained in these pages. For the most up-to-date information, please visit the COVID-19 section of our website. For more information, you can call us at (855) 853-6346. Lendio is not responsible for and provides no warranty as to the accuracy of this content. Lendio does not provide legal, accounting or tax advice. The information and services Lendio provides should not be deemed a substitute for the advice of such professionals who can better address your specific concern and situation.

SHARE

Derek Miller

Derek Miller is the CMO of Smack Apparel, the content guru at Great.com, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp.