For U.S. small business owners who received PPP loan assistance, one question plays over and over in their minds: What happens next?
What happens next:
In the months since the PPP was originally passed as part of the $2 Trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, U.S. industry leaders, financial institutions, advocacy groups, chambers of commerce, and business owners have recognized the need for greater program flexibility. So what does that mean for loan forgiveness?
Amendments approved by the U.S. House last week, passed unanimously by the Senate on Wednesday, and signed into law by President Trump on Friday, June 5th, illustrate growing awareness about how the pandemic is affecting regions, communities, markets and business owners in diverse ways. The Program, and its earlier terms for loan forgiveness, have been criticized for attempting to solve emergency assistance through a one-size-fits-all model. New amendments in the The Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) provide greater flexibility for borrowers. And “though the bill doesn’t provide for every contingency, it’s a significant step forward,” says Raj Tulshan, Managing Director of Hudson Capital Advisors, LLC and founder of Loan Mantra.
A joint statement issued by SBA Administrator Jovita Carranza and U.S. Treasury Secretary Steven T. Mnuchin shares their resolve for “more time and more flexibility [for businesses] to keep their employees on the payroll” and for “getting the American people back to work as quickly as possible.” The new bill also confirms June 30, 2020, as the last day a PPP loan application can be approved.
Though there will likely be ongoing resolutions (known as Interim Final Rules) and updates to the loan forgiveness application in upcoming weeks ahead, Loan Mantra is here to guide you through the most current information about PPP loan forgiveness. Our synopsis is intended to break the information down simply, but shouldn’t substitute for a thorough reading of the bill.
Loan forgiveness today:
The following changes were proposed to the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010) in regards to loan forgiveness:
- Extension of Loan Use: The extension of the borrower’s spending period increased from 8 weeks to 24 weeks. Borrowers may now use loan proceeds for up to 24 weeks after they receive loan disbursal.
- Payroll Flexibility: The bill provides for additional loan flexibility, specifically as it relates to the 75%-25% breakdown of payroll to non-payroll expenses. The new proposed breakdown is 60%-40% of payroll to non-payroll, with the minority margin being allotted for uses such as rent, mortgage, utilities, and other acceptations.
- Repayment Terms: The repayment period for unforgivable loan debt has been lengthened from 2 years to 5 years. (Any pre-existing loans may amend their notes to reflect new maturity terms).
- Safe Harbor: The bill expands safe harbor terms for borrowers rehiring employees by allowing loan forgiveness to not be affected by a reduction in employees if the borrower is able to document an inability to rehire individuals; to rehire similarly qualified employees; or to return to the same level of business activity they were operating at before February 15, 2020. This is particularly important news for business owners and employees who found themselves at odds with the intended purpose of the PPP loans through federal unemployment increases. With a rise of unemployment coverage to $600 per week, some employees are making more on federal assistance than while employed. Employers have found it challenging to rehire their employees through the Paycheck Protection Program when employees could take a financial loss.
- Deferral Period: An extension of the deferral period has been extended from 6 months to 10 months after the end of the borrower’s 24-week loan use (or “spend”) period. This means borrowers will not be required to begin making payments on PPP loans prior to determining their loan forgiveness. The goal is for borrowers not to pay on a loan that may be fully or partially forgiven by the U.S. Small Business Administration.
Forgiveness still to be determined:
- The bill does not currently include a de minimis threshold for forgiveness. This would allow for simplified or automatic forgiveness for loans under a certain size. So, ultimately a $10,000 loan will not be put through the same, potentially onerous forgiveness process as a $10 million loan. Lender advocates are currently lobbying for a threshold to be included in the loan forgiveness terms.
A Loan Mantra for the future:
As with any prior economic recovery in the U.S., the SBA will continue to play a major role in helping main street America access capital. As your business recovers from the COVID-19 pandemic and as you seek additional funding and recovery—including traditional SBA loans or bank financing—look to Loan Mantra. Our unparalleled financial know-how, nationwide network of experts, and best-in-class technology, BLUE™, will ensure you brighter days ahead.