Thoughts on receiving both EIDL and PPP loans

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Last week I wrote about my successful Economic Injury Disaster Loan experience, and mentioned in passing “the programs [EIDL and PPP] are very different, and while not technically mutually exclusive (you can take out loans from both programs, under certain conditions), most businesses will only take advantage of only one or the other.”

Overall I thought it was a good and useful post, but that sentence kept coming back to bug me, since if I read it on anyone else’s blog, or in a newspaper’s “Business” section, I would immediately ask, “under what conditions?” In other words, who can and who should take out loans through both EIDL and PPP?

So, in this post I’ll ease my conscience by exploring that precise question.

EIDL and PPP loans cannot be spent on “the same” expenses

Let me say up front, from a business perspective, this rule makes no sense. Money is, famously, fungible, so there’s no meaningful sense in which any individual loan is being “spent” on any individual expense. What this rule seems to mean is simply that you cannot borrow more money combined through the two programs than your actual expenses: if you have $100,000 in expenses, you cannot borrow $75,000 from EIDL and $75,000 from PPP because that would mean $50,000 was spent on the “same” expense.

In practice, since PPP loans are forgivable when 75% of your loan is spent on payroll, you should “allocate” your PPP loan to payroll, rent, mortgage, and utility payments, then “allocate” your EIDL loan to any remaining eligible expenses up to your total expenses. Since this is all an accounting fiction, all I can recommend is to keep your receipts!

Remember: EIDL advances reduce PPP loan forgiveness

The amount of your PPP loan forgiveness eligibility is reduced by the amount of your EIDL advance. EIDL loans have 30-year terms, but any non-forgiven PPP balance is due in just 2 years, so you should set aside or plan to save up the amount of your advance to begin repaying your PPP loan 6 months after disbursement and complete repayment in 2 years.

In practice since EIDL advances are capped at $10,000 this shouldn’t be a huge obstacle for a firm big enough to be interested in pursuing both loan types.

Who should pursue both EIDL and PPP loans?

Hopefully at this point the picture is a little clearer: a firm might consider taking out both types of loans if they have both high ongoing operating expenses and high payroll expenses. By “allocating” their PPP loan to payroll and other eligible expenses, they receive two free months of payroll and (at least) discounted rent and utilities, which is especially nice if the firm is able to stay open and continue bringing in revenue.

The EIDL loan can then be “allocated” to operating expenses (although not “expansion of facilities or acquisition of fixed assets” or “repair or replacement of physical damages”). The EIDL loan does have to be repaid, but on very favorable terms: 30 years at a fixed 3.75% APR, with no origination fees or prepayment penalties and a one year delay before the first payment is due.

Why I won’t be pursuing the PPP option

While researching this post I contemplated the possibility of taking out a PPP loan, but in my case ended up convinced that it would make no sense. Although I do have ongoing operating expenses I could “allocate” my EIDL loan to, after reducing the maximum PPP loan I’d be eligible for (multiply the previous year’s payroll by 2.5, then divide the result by 12) by the amount of my EIDL advance, I’d only be eligible for a few hundred dollars in loan forgiveness!

And that’s assuming I could find a lender willing to handle a PPP loan as small as mine would end up being.

Conclusion

Are any readers pursuing separate EIDL and PPP loans? How have you found the experience so far? Has your PPP lender tried to convince you to convert your EIDL loan to PPP? Sound off in the comments.