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As a business owner, you will quickly learn that the term “loan” is an umbrella term that covers various loan types. Not all loans are the same, and being able to differentiate one loan type from the other is a great way to be informed on the best type of loan to apply for when necessary. 

Out of the different types of loans offered in many credit facilities, two types that are often thought to be similar are the PPP and the SBA loans. Although they may look similar at first glance, they are very different loans.

Are you wondering what the difference between PPP and SBA loans is? Here is all you need to know about PPP and SBA loans.

Knowing The Difference

Many businesses will, at some point, require an additional financing option to support business operations. Small companies primarily depend on getting a loan to finance equipment, expand their businesses, or, overall, be used as capital for production. In fact, 29% of small businesses fail because they run out of capital to keep up with business operations.

To solve these problems, business owners (especially small business owners) resort to applying for loans that will be spread out over a specific period and be repaid on or before this period runs out.

There are different types of loans that are usually awarded to small businesses through money lending associations like banks and credit unions. However, many of these loans are not small-business-friendly as these money lenders are skittish when dealing with loans for small businesses. Money lenders consider small business loans highly risky, cost-inefficient, and expensive to approve.

The small business loan approval percentage in big banks was a low 14.3 as of December 2021. This proved that small businesses rarely get the loans they apply for at big banks. When they do, the repayment terms often feature high-interest rates and a short repayment period. As a result, many businesses look to government agencies for better loan terms. Two of these government-issued loans are the PPP and SBA loans.

PPP and SBA loans are two different types of loans designed to provide small businesses with varying types of financial relief in specific aspects of their operations. If you are wondering which of the two loans is best for your small business, it is ideal to know not only the similarities but also the differences between both loan types.

Knowing the differences between these types of loans will help you determine which one of them is best for your business.

Overview: PPP And SBA loans

PPP and SBA loans are both SBA-guaranteed loans. This is undoubtedly why many people have trouble telling them apart. The SBA or Small Business Administration is a government agency set up to promote the business economy by offering financial assistance to small businesses in need. In a way, the SBA is a lifeline for struggling businesses.

The SBA is a U.S. government agency that uses a series of tools to help businesses gain easy access to capital, equipment funding, and contracts that will otherwise be difficult for these businesses to acquire outside the agency’s umbrella. Created in 1953, the SBA’s primary goal is to assist small businesses and offer financial solutions in the businesses’ best interests.

Since its establishment, the SBA has done a remarkable job of counseling and protecting the interests of small businesses that come to them for financial aid. They do this with different loans and financing options, two of which are the PPP and SBA loans. It is important to note that although the SBA guarantees the SBA and PPP loans, they are not disbursed out of the SBA’s own pockets.

The SBA agency works with many lenders and alternative legal lenders to offer loans to small businesses on better terms than they usually do.  The SBA partners with banks, credit unions, and other legal financing agencies to draft an agreement where they (the SBA) agree to co-sign the lending approval process.

So, now that the similarities between both PPP and SBA loans are apparent, how do you know the differences between them?

What Are PPP Loans?

Before we burrow deeper into understanding the difference between PPP and SBA loans, it is essential to know that the PPP loans have been discontinued. This took place on the 31st of May, 2021. PPP loans were created as a Paycheck Protection Program to help struggling businesses in 2020.

The Paycheck Protection Program is a $953 billion business loan program started in the United States by the federal government to respond to the adverse effects of the Covid-19 pandemic on businesses- especially small businesses. PPP loans kicked off during the Donald Trump administration as a form of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

The U.S. Congress passed the CARES Act economic bill in a bid to deal with the economic problems that were a result of the lockdown restrictions. Although the impact of Covid-19 was felt in many business sectors, small businesses took a more substantial hit than their larger counterparts.

Businesses were temporarily closed down (at least 43% of businesses closed down temporarily), forcing production, and essentially sales, to stop. Revenue declined, liabilities piled up, and amidst all these problems, small businesses had little to no funds to ensure that their business operations continued on smoother tracks. 

The pandemic affected many parts of business operations. However, one noticeable impact was the inability to pay workers’ salaries. The full extent of the health crisis became clear as day when many businesses struggled to pay their workers. The impact of the pandemic on wages and salary payment varied with sector and location, but it was undeniable that there was evident business economic instability on the rise.

After all, with unemployment on the rise and the few employed citizens receiving a lesser amount than they usually did, poverty was on the rise. To battle this problem, the government came up with relief programs to help businesses continue fulfilling their payroll payments. The Paycheck Protection Program was one of them.

PPP loans came in three categories which were first-draw, second-draw, and special cases loans. The first draw was the disbursement of about 2.5 times the value of the business’s average monthly payroll. It was given to companies that missed the initial (two) rounds of PPP funding worth over $300 billion.

The second-draw loan was for businesses that exhausted their loans from the first or second PPP funding without being able to cater to all their financial needs. These businesses were considered in terrible financial conditions and were eligible for an extra $2 million as a second draw. Lastly, special cases PPP loans were reserved for those businesses that didn’t get the full amount that they should have.

Many small businesses were eligible for PPP loans. From some nonprofit organizations to sole proprietors, tribal businesses, and self-employed workers. PPP loans were low-interest private loans that businesses could use to pay their employees and cover other business needs. This kept people employed and businesses open during the pandemic.

What Are SBA Loans?

Like PPP loans, SBA loans are drafted by the Small Business Administration. SBA loans are loan programs drafted in an agreement between money-lending institutions and SBA agencies to create better loan terms for small businesses. SBA loans are highly sought-after because of their more flexible terms and better deals than any other loan program can offer.

With SBA loans, the SBA assumes some of the lender’s risk in case the small business defaults on the repayment terms. But why will they do this Small businesses usually fail to meet up to the necessary financial requirements that are required for loan eligibility, from having credit problems to lacking substantial business history and having an irregular business cycle, all of which big banks consider too high of a risk when dealing with loan applications.

With SBA loans, the SBA guarantees a portion of the loan amount, ensuring that the lender doesn’t shoulder the transaction risks alone. 

Difference Between PPP and SBA Loans

There are some notable differences between PPP and SBA loans. Some of these are:

1. Eligibility 

PPP Loans

Although PPP loans were meant for economic relief, they were still set aside for only eligible businesses. The eligibility requirements depended on which PPP loan categories the business applied for. Some of the eligibility requirements include:

• A business that was operational before the 15th of February, 2020
• Less than 500 employees per location as the SBA industry size standards (or less than 300 in second draw PPP loans)
• Self-employed individuals
• Located in the United States
• Sole proprietors or independent contractors
• Must prove a 25% revenue decrease in the first four months of 2020
• Must have used up first PPP loans (second draw)

SBA Loans

SBA loans provide fairer loan terms, but they are seen as any other loan type. This is why applicants must meet specific loan eligibility requirements that convince the lenders that the business owner will have no problem repaying the loan in due time.  Needless to say, SBA loans have very different eligibility requirements from PPP loans. SBA loan requirements are stricter yet broader than those of PPP loans. Some of these requirements include:

• Excellent personal and business credit
• Located in the U.S. and all operations done within the country’s territories
• Meet SBA size standard
• Operate for profit (not a non-profit organization)
• A history free from recent bankruptcies, foreclosures, or tax liens
• Suitable business history
• Collateral for loan request
• Sufficient cash flow
• Personal and business financial documents
• A strong business plan
• Profit and loss statement
• A convincing resume
• Must provide all other necessary documents

2. How It Works

PPP Loans

The PPP loan amount disbursed to a business depends on its payroll costs. This cost included factors like wages and salaries, health insurance, retirement benefit, commissions, severance pay, and paid leave. The general PPP loan was paid per payroll cost and was about 2.5 times the average payroll costs. This was considered the first-draw.

Essentially, PPP loans were not just any type of loan. They were strictly designed to offer financial relief during the covid-19 pandemic. They did not require collateral or personal guarantees to be approved. Additionally, they had an interest rate of 1% to be repaid approximately 16 months after the business received its first loan.

It is equally important to note that PPP proceeds were used only for employee benefits. This includes:

• Gross wages and salaries
• Furlough pay
• Sick leave
• Holiday pay and bonuses
• Vacation leave
• Severance 
• Other compensations
• Some non-payroll costs like interest, rent, utilities, and mortgage interest.

The limit to be spent on each employee was stated to be $46,154. PPP loans were applied for at SBA-approved lenders using an official SBA form or one provided by the lenders. 

SBA Loans

SBA are long-term loans with different loan amount options that depend on the business owner’s needs. These loans are designed for small businesses and range from tens of thousands to millions of dollars. Some of the most common loan types are 7(a) loans, 504 loans, 8a Business Development loans, microloans, Community Advantage loans, and Cap lines.

The type of loan best depends on your financial needs and your money lenders’ terms. While PPP loans were designed as a temporary and short-term relief from the economic decline due to the pandemic, SBA loans were created as a long-term financing solution. They have a more extended repayment or maturity term that can be up to 25 years, depending on the borrower’s business sector.

SBA loans also have a higher interest rate than PPP loans. Although the rates are still lower than those of other loan programs, SBA loan interest rates can range anywhere from 2.25% to 5% or more. The most crucial difference is that SBA loans can be used for a broader range of expenses. This can be anything from start-up capital to heavy equipment financing, expansion, to starting a tow truck business, as working capital, and even making real-estate purchases.

SBA loan uses are not as limited as PPP loan uses. It is also worth noting that SBA loans can still be applied for as at the time this article was written. All you need to do is approach any legal money lender or check the SBA website for information concerning what loan type you might be interested in.

SBA loans generally take a longer time to be approved and disbursed. The approval timeline can be anywhere from two to three months (60-90 days) or even longer. This is a more lengthy process than PPP loans require.

3. Forgiveness

Unlike many SBA loans, part or all of a PPP loan can be forgiven. Borrowers may be eligible for a Paycheck Protection Program loan forgiveness if they meet the requirements. The loan forgiveness requirements vary with the type of PPP loan the business is qualified for.

Some PPP loan forgiveness terms include:

• Employee and compensation levels are maintained
• Loan proceeds are spent on payroll costs and other PPP-eligible expenses
• At least 60% of loan proceeds spent on payroll payments

PPP loan borrowers are eligible for complete loan forgiveness if these terms are met during the 8- to 24-week period after the loan is disbursed. Businesses can apply for loan forgiveness any time up to the maturity date of the loan as long as all loan proceeds have been used. Businesses must apply for forgiveness ten months after the last day of the covered period, or the appeal will be denied, and the business will be required to start making payments.

So, What’s The Bottom Line?

PPP and SBA loans are both excellent financial relief for struggling businesses. However, it is essential to know which form of loan is perfect for your financial situation and needs. Are you planning to take a loan from the SBA? At Coastal Kapital, our SBA loans are perfect for you!

We are committed to providing fast financing with excellent loan conditions. Along with our swift SBA loan options, we offer transparency and expert loan counseling to set your business on the right financial track. From line of credit options to working capital loans and equipment financing, we will make your loan application and approval process as hitch-free as possible.

Do you want to get started? Check your eligibility status for any loan programs on our official website or contact us at [email protected] to begin your loan application process.

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