Proven Strategies: The EIDL Vs. the PPP

In our last article we discussed the Payroll Protection Program (PPP), which the government initiated to cover business-related expenses such as payroll, rent and utilities. But the Government also issued a second (and lesser known) relief program, named the Economic Injury Disaster Loans (EIDL).

The good news is that the EIDL can be used for a much larger group of expenditures, which we will discuss in this article.

For small business owners hit hard by the Coronavirus Pandemic, the CARES Act still has funds available after the second round of financial relief and offers several SBA programs to offset the negative economic impact. Two that have been in the news are the Payment Protection Program (PPP) and Economic Injury Disaster Loans (EIDL).

PPP vs EIDL – How do the Loans Compare?

These are two separate programs, and the benefits of each depend on your business and situation. PPP allows businesses borrow up to $10 million in loans that are 100% forgivable if they do not lay off any employees or if they rehire employees they have already laid off.

The EIDL allows businesses borrow up to $2 million in loans and includes a grant of up to $10k.

What is an Economic Injury Disaster Loan (EIDL)?

If you are self-employed and do NOT have employees, this may be a good option for you. The federal Small Business Administration (SBA) runs the Economic Injury Disaster Loan (EIDL) program directly. A part of the loan may be forgiven (up to $10k).

In the thoroughbred industry, this program is especially valuable for independent contractors such as bloodstock agents, jockey agents, blacksmiths, bookkeepers, pinhookers, and/or small breeding operations.

What can EIDL be used for?

Payroll, fixed debts, accounts payable, other expenses that you are unable to pay directly due to the Covid-19 impact.

What are the basic terms of the EIDL?

If qualified, you can borrow up to $2 million under the following conditions – 3.75% APR for up to a 30-year term.

How do I apply for EIDL?

You should apply online at covid19relief.sba.gov. There are no costs or fees to apply. On the application, you can check the box to be considered for an advance before your loan is finalized. You will need to provide a bank routing number and account number for them to deposit the loan advance.

How much of EIDL is forgivable?

Up to $10k available as an emergency grant, upon approval. The SBA will determine how much loan advance they will give you, and when they will send the loan advance. If you receive a loan advance, the advance will not have to be repaid. The loan advance may be $10,000, but it may be less.

May I apply to Both PPP and EIDL?

Yes, you may apply for both. But you cannot use the funds from both loan programs for the same purpose. In order to help clarify the use of funds for the two programs, please find below some examples of how to best utilize the funds for your horse-related business, from each program.

PPP                         EIDL

Payroll                   Fixed debts (rent, etc.)

Rent                       Working capital

Mortgage             Inventory

Utilities                 Equipment

Purchases

Real estate payments

Operating expenses

Payroll

Accounts payable

Questions:

I know that PPP loan money can be used for payroll, rent and utilities. What can I use EIDL loans for? How about repairs, maintenance, insurance, car expenses and professional fees?

EIDL proceeds can be used for operating expenses.

What about stud fees?

If stud fees can be characterized as operating expenses, then EIDL loan proceeds can be used.

Hay, feed, shavings and other supplies?

Hay, feed, shavings, and other normal supplies would be operating expenses, so okay.

To buy new horses, which is inventory for me, because I pinhook horses for resale?

EIDL proceeds can be used for inventory.

Buy a new truck for the farm?

If the truck is considered equipment, then EIDL loan proceeds can be used.

I have never paid myself a salary, but I am active in the business. My cash flow comes from distributions and the net income I take out from the profits. Can I take out a salary from the loan proceeds equal to what I used to take out before COVID-19?

EIDL proceeds can be used for payroll, but not for disbursements to owners unless for performance of services.

Is the lower interest that I pay on the loan still tax deductible?

Since the loan is business-related, the interest can be deducted.

Can my business pay me a dividend or bonus with the EIDL money?

The EIDL proceeds cannot be used for dividends or bonuses.

I have other debt (credit card and bank loans) with higher interest rates. Could I pay them down and save money because the interest on EIDL loan is less?

The EIDL proceeds can be used for accounts payable, but not for the refinancing of long-term debt.

I have been basically a pinhooker. Could I use part of the funds to go into a new business?

The EIDL proceeds cannot be used for expansion of facilities or acquisition of fixed assets.

If my PPP loan funds are used for payroll and utilities and that satisfies the amount of PPP funds received, can I now use EIDL for utilities, rent, etc.?

The EIDL proceeds can be used for fixed debts, such as rent.

I want to move my business. Is that cost allowed with the funds?

The EIDL proceeds cannot be used for relocation.