Many small businesses are finally seeing their applications approved and funding granted for the Payroll Protection Plan Loans (“PPP”) after weeks of confusion and uncertainty. As the SBA and big banks continue to fumble through the second round of PPP funding, many borrowers are now focusing on how best to use their funds to optimize the best part: potential 100% loan forgiveness.
Although much of the guidance on loan forgiveness remains shrouded in governmental ambiguity and overall confusion from lenders and the public, we anticipate additional clarity from the SBA over the coming weeks as regulations continue to evolve. Below is a summary of steps, based on currently known information, that give you the best chance for maximum PPP loan forgiveness. Borrowers will apply for forgiveness directly through their lender at the end of the 8-week period, and as with the initial loan application, each bank’s process may differ.
The following have been designated as covered/qualified costs by the SBA when calculating loan forgiveness:
A few things to note:
Remember, a minimum of 75% of the loan must be used on eligible payroll costs to be forgiven which means no more than 25% of the loan can be used on non-payroll expenses.
The current guidelines form the CARES Act state that covered costs must be incurred and paid in the 8-week window. We are hoping that this gets modified so that it does not create additional administrative headaches.
A crucial piece of loan forgiveness will be keeping accurate records and being able to provide the required documentation necessary for forgiveness. While different lenders may request additional items, we expect the following to be required:
The loan can be forgiven either in whole or in part. To maximize forgiveness, accounting for the PPP proceeds and related expenditures properly on your books is of vital importance. This will also help you streamline the process of applying for forgiveness at the end of the 8-week period. Lenders will have 60 days of the receipt of the forgiveness application to determine those amounts eligible for forgiveness.
There are various factors that could reduce PPP forgiveness to keep in mind while utilizing these funds:
Many employers are facing a strange new difficulty as PPP loans continue to fund: how to utilize PPP funds within the 8-week period to pay former and prospective employees if their businesses are closed and there is no work for employees to perform. Further still, how to incentivize employees to return to the workforce if they are currently making more via unemployment income than they were via regular salary and wages from their jobs, as is the new reality for many in California.
Although many business owners are turning to creative solutions to utilize their PPP funds (i.e. paying contractors via W2 rather than 1099, paying bonuses to essential employees, etc.), guidance from the SBA on this issue has unfortunately not yet been provided. However, we are hopeful clarification continues in the coming weeks and we will provide any new updates as soon as they are released.
The SBA recently issued additional guidance that has caused some concern with business owners regarding the Good Faith Certification where borrowers are required to “assess their economic need for a PPP loan” and “take into account their current business activity and their ability to access other sources of liquidity”.
We feel it is a best practice to document your economic need for the loan. At a minimum, you should have a forecast/model along with notes that address economic uncertainty tied to your business, the detriment to your ongoing business operations and your access to other sources of liquidity.
If you feel that you don’t qualify under these clarified standards, you can return loan by May 7 and you will be deemed to be in good faith.
As always, our team at BFLC is here to help. Please feel free to reach out if you have any questions on this topic or anything else.