For small businesses impacted by the coronavirus outbreak, the Paycheck Protection Program has been both a source of hope and frustration over the past few weeks.
A troubled rollout, unclear guidelines, unprecedented demand, and a bottleneck of applications clogging up an outdated system led to many business owners not qualifying for a loan during the first round of funding through the CARES Act. The mad scramble for PPP loans was no doubt based on the fact that these low-interest loans are also forgivable. Every business owner in America right now would gladly take free money to help keep their business afloat.
Now that some business owners are receiving loans and millions more will hopefully soon follow suit, it's time to turn your attention to the details of loan forgiveness.
The terms of an unforgiven PPP loan are still generous--1 percent interest, paid back over two years, with no other borrower or prepayment fees. But why pay more than you need to? Follow these four steps to ensure PPP loan forgiveness.
1. Review what loan uses will be forgiven.
Remember: Lenders will forgive your PPP loan if you spend 100 percent of the funds on payroll, mortgage interest, rent, and utilities in the eight weeks after receiving the loan. You must spend at least 75 percent specifically on payroll. The other 25 percent can be divided up between rent, utilities, and mortgage interest (if applicable).
You can also use your loan to cover existing debt obligations, such as credit card payments, but you will not receive loan forgiveness on those costs.
The idea is that this loan will keep your workers employed and your lights on for the next two months after you receive the funds.
2. Understand how your loan forgiveness can be reduced.
PPP loan forgiveness is not binary. It can be reduced by various degrees, depending on how you spend your loan. There are two main actions that will reduce your loan's forgiveness:
Using more than 25 percent of your loan on non-payroll costs: In this case, your maximum forgivable amount will be equal to payroll costs divided by 0.75.
Reducing head count or "material" salary: To maintain 100 percent forgiveness, you'll need to either keep your payroll as it was before February 15, 2020, or hire back and undo wage reductions by the end of the PPP "covered period" on June 30. The total amount forgiven will be reduced proportional to the reduction in head count, or decreased by the total amount of reduced salary if you cut an employee's wages by more than 25 percent.
If you laid off employees or reduced their wages and then received a PPP loan, it's time to hire them back or reinstate their salary. Every dollar that you don't spend on doing so is a dollar you will need to repay, plus interest.
3. Document all of your loan expenses.
A lender won't simply take your word for it if you tell them you spent your loan proceeds appropriately. From the moment your loan hits your bank account, you'll need to be diligent about how you appropriate your funds and document every expense you make with them.
When it's time to apply for loan forgiveness, bring the following documentation with you to the table, assuming you spent your loan proceeds on all eligible categories:
Documents verifying the number of full-time equivalent employees on payroll, and their salary/wages for the period you used the loan to pay them. These could include payroll reports from a payroll provider, payroll tax filings, income/payroll/unemployment insurance filings from your state, and paperwork that verifies retirement and health insurance contributions.
Documents showing payments of mortgage interest, rent, and utilities. These could include canceled checks, payment receipts, or account statements.
Sole proprietors and other self-employed workers can use loan proceeds to replace lost income (up to $100,000 annualized), but if you do this, the remainder of your loan must be used on non-payroll costs in order to qualify for full forgiveness.
4. Follow your specific lender's guidelines.
Finally, keep in mind that though the SBA oversees this program and gives final approval on loans, your PPP loan comes through your lender. That lender may ask for additional documentation, or that you use certain channels to request loan forgiveness. There is no "one-size-fits-all" set of guidelines here, other than that your lender must give you a response to your loan forgiveness request within 60 days of receiving it.
Therefore, make sure you understand your lender's rules for loan forgiveness when you take out your loan, and check in with them throughout the forgiveness process. During this pandemic, every dollar counts, so don't let a simple mistake or misunderstanding stand in the way of total loan forgiveness when the time comes.