There has been a lot of talk in the media lately about Paycheck Protection Program (PPP) loans and how and when they may be forgiven. Small businesses that took advantage of PPP funding will need to prepare to submit a loan forgiveness application to their lenders to have those loans forgiven.
According to the Small Business Administration (SBA), nearly 4.8 million loans totaling more than $518 billion have been granted to small businesses to help mitigate the negative economic impacts of the COVID-19 pandemic. The program offered forgivable government-backed loans worth up to $10 million at a 1% interest rate to small businesses that qualified. (As of August 8, 2020, the PPP is no longer accepting loan applications.)
While PPP funding was key to saving many small businesses, many businesses continue to struggle as the pandemic lingers across the US. For borrowers to have their loans forgiven, they will be required to prove that they spent their PPP funding as the loan terms specify - or they may have their forgiveness amount reduced. This could mean that they would be responsible for paying back a portion of their PPP loan with interest. That’s why it’s important for small businesses to follow the loan requirements closely, document all expenses, and submit an accurate application for forgiveness.
Overview of PPP Forgiveness
The primary intent of the PPP was to enable small businesses to keep their employees during shutdowns or other COVID-related disruptions, maintain salary levels, and rehire workers that had been laid off.
Initially, when the law passed in March, small businesses were required to spend 75% of their funding on payroll costs, and their loan had to be used within an 8-week period. Since then, the Paycheck Program Flexibility Act of 2020 has passed which added more flexibility around these requirements. With the new legislation, only 60% of the loan is to be used for payroll and the funds can be used over a 24-week period.
Payroll costs include employee gross salaries, hourly wages and cash tips, paid sick or medical leave (up to an annual aggregate amount of $100,000 per employee), plus employer retirement contributions, group health insurance premiums, and state and local payroll taxes imposed on compensation. Non-payroll costs include eligible mortgage interest payments, rent or lease payments, and utility bills.
The SBA, in consultation with the Department of the Treasury, released a detailed, 10-page PPP Loan Forgiveness FAQ on August 4, 2020 which provides answers to questions regarding what expenses are eligible for PPP funding, regulations surrounding the Covered Period (the timeframe when you can utilize the loan), how to perform the required calculations, considerations for different business classifications, and more.
If and When Payments are Required
Borrowers may wonder when they need to begin to pay back their PPP loan. According to the SBA’s FAQ:
As long as a borrower submits its loan forgiveness application within ten months of the completion of the Covered Period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by SBA.
If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan. (Loan amortization started out at 2 years but can be extended to 5 years.)
Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven.
How to Apply for PPP Loan Forgiveness
Borrowers applying for loan forgiveness should determine their deadline for submitting application (within 10 months of completion of the Covered Period) and contact their lender to see how they are taking applications. Lenders may have a specific process to follow. Additionally, applicants should review the application and instructions well in advance to allow time to perform the necessary calculations and gather the supporting documentation that is required.
There are two application forms available. The SBA has released the new PPP Loan Forgiveness Application Form 3508EZ, which is designed to streamline PPP forgiveness for certain businesses that qualify. This form should be used by businesses that meet at least one of the following criteria:
Owner is self-employed and business has no employees; OR
Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR
Experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.
For more detailed information on whether individuals qualify to use the EZ form, download the instructions here. Otherwise, businesses should use the following:
We’re in the business of helping small businesses thrive! If you need help or advice navigating this process, please feel free to contact us.
Sunshine State Economic Development Corporation (SEDCO) is a not-for-profit certified development corporation (CDC) licensed by the U.S. Small Business Administration to offer the SBA 504 Loan Program throughout the state of Florida. SEDCO can provide your expanding small business with alternative financial resources, sound financial advice, and business acumen. Helping small business succeed is our business. For more information, visit our website or contact us.