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SBA Loan Forgiveness for PPP, EIDL and 7(a) Loans

Jason Milleisen
Jason Milleisen

What are the main features of PPP and EIDL loans, and how does the forgiveness process vary for each loan type?

In the time of COVID, there is a lot of confusion about the different types of SBA loans that are out there, and what types of terms come along with them today. Today, I'm going to explain the main differences between the "emergency" loan programs that have been available to small businesses and compare them with typical SBA loans, (with the most common being 7(a) loans, so that people can try to understand what their options are. After all, it's difficult to figure out a plan of attack if you don't understand the rules of the game.

Paycheck Protection Program (PPP) loans 

First, let's talk about PPP loans, also known as the Paycheck Protection Program. PPP loans were designed to be disbursed through nearly 5,500 lenders across the country who typical offer typically offer other types of SBA loans (like 7(a), Express, and 504 loans). The purpose of the PPP loan was to provide a way for small businesses to keep workers on their payroll. 

In other words, instead of having businesses lay people off and the government paying them unemployment, the PPP loan was designed to allow lenders to provide money to small businesses so that they didn't have to lay people off. Like I said, in a roundabout way, it was just another form of unemployment without having to file for unemployment.

PPP loans were (no longer available as of the writing of this article) available in amounts of up to $10 million. In most cases, borrowers were taking much less than $10 million, as the amount that you were eligible for was dependent on your level of payroll for your business.

For a sole proprietor like me, I can only take 2.5 months' salary. And that salary was also capped at $100k. That means regardless of how much an employee earns, you can only pay them for 2.5 months of salary as if they were making $100k.

Paycheck protection program loans were essentially interest-free (a 1% interest rate). Initially, these were two-year loans, but eventually, they were turned into five-year loans, depending on when your loan was approved. PPP loans were pretty great in that they did not require collateral from the business, nor did they require personal guarantees. Anyone who's spent any time reading my blog about personal guarantees understands how important it is as a business owner to understand whether or not you've pledged your personal guarantee.  The difference is enormous. In a nutshell, because no collateral or personal guarantees were required, if your business ends up closing, there is no recourse back to you personally, which is tremendously important.

Here's another important facet of the PPP: These loans are 100% forgivable if all the employee retention criteria are met, and the funds are used for eligible expenses. I'm not going to get into all the details, but you can certainly go to the SBA website to learn additional details about what's eligible and what's not.

Payments on the PPP program will be deferred for a period, depending on when the borrower submits a request for loan forgiveness. As of the writing of this article, these loans are no longer available. It doesn't mean they won't be available going forward, and people are watching Congress closely to see if they pass another round of financial aid for small businesses. There's been a lot of criticism about the PPP program, both through the origination, where there were accusations of preference that lenders gave to existing borrowers, as well as on the back end, as the forgiveness rules seems to be changing.

So that's a quick rundown of the PPP program. If you'd like additional detail, there are lots of resources out there, including right on the SBA's website.

FYIFYI: PPP loans are 100% forgivable if all the employee retention criteria are met, and the funds are used for eligible expenses.

Economic Injury Disaster (EIDL) loans

Next, Let's talk about the Economic Injury Disaster Loan (EIDL). These loans are very different than PPP loans. The purpose of the EIDL loan is to meet financial obligations and operating expenses that could have been met had the disaster not occurred. If you owned a restaurant, and your business got shut down due to your state's COVID restrictions, an EIDL potentially could help you cover things like rent and working capital (equipment repair, inventory, etc.).

The EIDL loan offered as much as six months of working capital, meaning a business could potentially get substantially more from EIDL from PPP. The rates on these were higher than the PPP loan, yet they are still very reasonable. For-profit borrowers under the EIDL program could get a fixed 3.75% rate; nonprofits could get 2.75%.

The unusual thing about the EIDL loan relative to other types of SBA loans, such as the 7(a), is that it comes with a 30-year repayment term. (7(a) loans are typically 10 years long.) Having an additional 20 years to repay debt would make the payment relatively low, especially with the low interest rate.

Differences from the PPP loan

First collateral is required for any loan over $25,000. If you own a restaurant and you take a $50,000 EIDL loan, you would be required to pledge your business assets as collateral. Another important differentiator is that if your loan under an EIDL loan exceeds $200,000, you would be required to personally guarantee it. If your business closes next week, you're personally liable for the debt.

Here's another very important facet of the EIDL loan. These loans are not intended to be forgivable. In other words, they are not designed to be completely forgiven, but the expectation is you will pay a small amount every month for 30 years. Over time, the loans can be repaid at any time with no prepayment penalties, but for most businesses that are struggling, a prepayment penalty is really not that interesting or attractive of a feature since it likely won't be relevant to them. The first year of payments on these loans is deferred.

Did you know?Did you know? EIDL loans are not intended to be forgivable. In other words, they are not designed to be completely forgiven, but the expectation is you will pay a small amount every month for 30 years.

SBA Offer In Compromise basics

The OIC process typically applies to SBA 7(a), Express and 504 loans. Disaster loans have an OIC process, but it's handled by a different SBA office. This section speaks to the most popular SBA loan, the 7(a).

In order to get an OIC approved, the SBA first and foremost requires you to prove that you're experiencing financial hardship and a lack of ability to repay your loan. This means you don't have the funds to pay them back, and that paying a portion of it is the most that you can afford.

For your business to be eligible for a settlement, the business itself needs to cease operations. This means that you're no longer accepting clients, and you're no longer producing products. It's OK if you collect on some final receivables or complete some projects prior to your offering compromise, but the business can't just continue to operate. It needs to cease operations. This is not true of the PPP loan.

The OIC typically is for the guarantor only (unless you specifically make a separate offer for the business entity). If your OIC is accepted, the legal entity that owns your business would still be liable for the debt. So, in that respect, the debt is not actually being completely forgiven – instead, the guarantor is simply being released in exchange for a cash payment.

Submission of an OIC is much more involved in terms of paperwork than requesting forgiveness through a PPP loan. They want a personal financial statement, tax returns, pay stubs and bank statements. Essentially, they're asking you to reapply for the loan all over again, except this time you're attempting to prove to them that you cannot afford to pay this debt in full.

Another difference between the OIC and the PPP loan is that the OIC must be reviewed and recommended by your original lender before it gets sent to the SBA. If your lender is not agreeable to the terms that you're offering, you will not have the opportunity to have it presented to the SBA (unless the bank closes their file). Contrast that with a PPP loan, where all you have to do is submit your application to the lender. They may vet it for completeness, but then they forward it right along to the SBA. Small PPP loans have a very short form that you need to forgive when applying for forgiveness.

Lenders are going to look at PPP loan forgiveness much differently than the SBA OIC. The reason for this is that PPP loans are 100% reimbursed by the SBA, whereas SBA 7(a) loans are typically 75% reimbursed. This means that the bank will be taking a 25% loss on any amount that's forgiven through the OIC program. As a result, the bank obviously has a financial stake in making the decision and, therefore, they will evaluate the much more critically than the PPP loan.

Frequently Asked Questions

Can you apply for both PPP and EIDL  loans?

Yes, although the funds have to be used for different purposes. In other words, you can't state that you're using your PPP loan for payroll and then use an EIDM loan for payroll. Businesses can receive an EIDL advance in addition to their PPP loan.

What can EIDL funds be used for? And how is it different from PPP?

EIDL loans are a little bit more liberal in permitted uses, mostly because they aren’t "free money." They can be used to cover working capital or normal operating expenses, such as healthcare, benefits, rent utilities and even debt payments. Contrast that with the PPP, where the loan proceeds really must be used for eligible payroll costs. And this is why this loan is forgivable. It's really not intended to pay business expenses. It's intended to keep people employed and off of unemployment.

Who's eligible for EIDL loans?

You have to be physically in the United States, which, of course, makes sense because the SBA is a United States government program. In addition, businesses need have to have 500 or fewer employees, and independent contractors are eligible as well.

Types of businesses that are not eligible are the same types of businesses that are not eligible for most other types of SBA loans. Businesses that are engaged in illegal activities, loan packaging, speculation, gambling, investments or lending. None of these are eligible, which is a surprise to no one, because you can't get a 7(a), 504 or express loan for these things either.

Is SBA loan forgiveness for PPP loans the same as an SBA Offer In Compromise for SBA 7(a) loans?

Now that we've covered what PPP and EIDL loans are and how they work, I want to talk to you about how complete loan forgiveness (which is a main feature of PPP loans) differs from partial loan forgiveness (the kind that I work on for SBA 7(a) loans), also known as an SBA Offer In Compromise.

If you've ever read my blog before, my entire business is based on this thing called an offer in compromise (OIC). The SBA OIC is not needed for PPP loans and is not the same as the 100% SBA loan forgiveness that is available for PPP loans. The OIC only forgives a portion of the debt if the SBA approves it. The PPP loan was always intended to be forgiven. The purpose of the PPP was to give money to business owners so they could give it to their employees so they didn't have to go on unemployment. Asking for this forgiveness is not breaking any prior arrangement or expectation of repayment of these loans.

Contrast that with an SBA 7(a) loan. Whenever a borrower takes an SBA 7(a) loan, it's always expected and agreed that they will repay it back in full with interest over a particular period of time, which is typically 10 years now.

Here's what’s really different about seeking forgiveness of a 7(a) loan versus a PPP loan. When someone submits an OIC, what they're really doing is going to their lender and saying, "I cannot afford to repay you on the terms that we agreed. And, therefore, I'm asking you to forgive a portion of that loan."

Notice that I said a portion of that loan. The SBA OIC is not designed for full 100% forgiveness. There is no such thing as 100% forgiveness when it comes to the SBA OIC. I've had people ask, "Will the SBA forgive me since I have nothing left?" The answer is no, they will not forgive 100% percent of the loan through the SBA OIC. The SBA OIC is a specific process whereby a borrower submits a package of information to the SBA, asking for a portion of the debt to be forgiven because of financial hardship and lack of ability to pay.

Will there be another round of PPP loans?

It's an excellent question that I don't know the answer to yet. I do know that there has been discussion in Congress about what else can be done to help small businesses, especially in light of the second wave of the coronavirus. As of now, there is nothing that has been approved. If I had to guess, I would say yes, there probably will be some additional help coming. The question of when and what magnitude it will bring is unknown.

What about taxes?

I am not a tax professional, and this is not intended to be tax advice. The issue of taxes is also one where 7(a) loan forgiveness differs from the forgiveness associated with a PPP loan. As soon as the PPP loan program rolled out, people started asking questions. The first of which was, "Will this loan be taxable?"

If it's forgiven, it was written into the CARES Act that these loans will not be taxable.  That's obviously a good thing, but some additional questions have arisen, such as if payroll costs are deductible.

From what I can gather, the IRS is saying that no, these expenses are not deductible, because it wasn't paid for with money from the business in the first place. When it comes to partial forgiveness that I help 7(a) borrowers with, the tax issue can also be confusing, but in a different way. The SBA does go out of its way anytime an OIC is approved to state that a 1099 C will be issued. However, that doesn't always happen, because it's up to the banks to issue them in most cases.

The rule of thumb we used at the lender I worked for was that the 1099 should go to the borrower, not the guarantors. What that means is if you have a legal entity that owns your business and has losses, then, potentially, any forgiveness could offset those losses. It gets confusing, because in most cases when an OIC is approved, a personal guarantor is released, but the debt forgiveness typically doesn't extend to the business itself. In other words, if that business had $1 million dollars in a bank account, then, legally, the SBA could pursue it for those funds even if you settle your personal guarantee.

What is the likelihood of being approved for a PPP loan forgiveness versus a 7(a) loan?

As I understand it, as long as you prove that the PPP funds for the designated purpose, you don't have to prove any level of financial hardship in order to have it forgiven. In that respect, it should be easier to have your PPP loan forgiven compared to your typical 7(a) loan.

In contrast, an OIC for a 7(a) requires approval by both the bank and the SBA, and those decisions are fairly subjective because the reviewer of the OIC needs to determine if the borrower has experienced significant enough financial hardship that renders them unable to pay, and also that the lender and the SBA have no better means of collection. In other words, they need to compare what you're offering to what their alternatives are. Typically, those alternatives include suing you and going after either your income or your assets. For those reasons, it's far more likely that your SBA OIC would be rejected, while PPP loan forgiveness should be easier to achieve.

Will there be a forgiveness process similar to an OIC for EIDL loans?

This is a good question. And I don't fully know the answer at this point. What I do know is that historically, disaster loans are serviced in different offices than 7(a) loans, and disaster loans in my experience are very difficult to settle. Assuming that these EIDL loans are going to be serviced in disaster loan servicing centers, it's my guess that there will be an OIC process for EIDL loans, but that it may be far harder to settle than a 7(a) loan.

Image Credit: fizkes / Getty Images
Jason Milleisen
Jason Milleisen Member
After a decade as a commercial underwriter and lender, Jason Milleisen founder Distressed Loan Advisors. Since 2009, DLA has helped hundreds of small business owners through the SBA Offer in Compromise process, resulting in over $50 Million saved. Jason is a former workout officer for the largest SBA lender in the US, where he oversaw a $400 Million portfolio of delinquent SBA loans.