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Paycheck Protection Program potholes on the road to loan forgiveness.

Congratulations! You have seen the light at the end of the tunnel that COVID-19 built, courtesy of Paycheck Protection Program (PPP) funds. However, for many entrepreneurs, the relief that they felt once the funds were secured was short-lived. Immediately, thoughts turned to the forgiveness aspect of the program. “Free money” always sounds too good to be true. And, depending on how you were educated on the program prior to applying and actually receiving your funds, PPP forgiveness may very well ring false. It is true that the loan may be completely forgiven. Yet, as you might expect, there are rules and processes to abide by to make today’s loan history. Otherwise, everyone would be applying and using this program!

The sticking point(s)

As entrepreneurs who were awarded funding have worked their way through the forgiveness process, some have encountered unwanted surprises. This is not to scare you; this is to partly underscore the importance of partnering with advisors who can help you understand the conditions from the get-go. Some sole proprietors have, especially with the onset of the First Draw (or first round) of PPP funding, received loans that are in excess of what is forgivable. For instance, during the application step, gross income may have been calculated instead of net income. Alternately, they calculated in benefits and no one in underwriting caught this oversight. The result has been proprietorships that end of up with loans over the limit. Ultimately, what was considered a silver lining can turn quite dark when the borrower must repay the loan while struggling to keep up with ongoing expenses as infection rates and mandates persist.

Alternately, borrowers may not fulfill the obligations associated with forgiveness; notably, that at least 60% of the loan must be allocated toward payroll expenses. While the loan’s terms are uncharacteristically favorable (at 1%), this is yet another debt or obligation that is placed on the shoulders of a business that is already struggling to keep its metaphorical head above water. This may just be the final obligation that sinks the business. If you are among those borrowers that are already experiencing significant PPP loan forgiveness anxiety, we encourage you to either return the too-big loan, or to work out an arrangement whereby the loan is reduced. Then, all is righted again – you get the funds that you need to stay afloat, and you can then qualify for the loan to be forgiven. So, it doesn’t add yet another burden to a plate that is already full of them!

The more you know (about PPP loan forgiveness)

The forgiveness terms for Second Draw PPP loans are similar to those associated with First Draw PPP loans, in that the following conditions are met in the eight- to 24-week period after the funds are disbursed:

  • The same employee headcount is maintained

  • Similarly, the same employee compensation is maintained

  • The loan is spent on eligible expenses, including payroll-related costs

  • A minimum of 60% of the loan’s funds go toward payroll costs

You can start the process of getting the loan forgiven once all of its proceeds have been exhausted. And you have until the loan’s maturity date to apply. If you apply 10 months after the last day of the “covered period,” the payments are no longer deferred. Borrowers must then make payments to the lender that secured the funds for you (in partnership with the SBA).

Four steps to forgiveness

Your lender was the gateway to PPP application and funding. Likewise, that bank or other financial institution represents the first step toward getting your loan discharged.

  1. Reach out to the lender that awarded your PPP funds. That lending body can assure you complete the correct document for forgiveness, which may be the longer-format 3508 or the shorter-form 3508EF and 3508S alternatives. Forms generally solicit essentials about the loan, from its amount to its disbursement date, and employee headcounts.

  2. Compile documentation. Ideally, you’ve been doing this from the get-go. Like the tax process, a little ongoing documentation collection and tracking can go a long way toward avoiding pitfalls, hiccups and headaches. Since payroll accounts for much of the forgivable expenses, the SBA largely categorizes documentation as “payroll” (i.e. third-party payroll provider reports, tax forms) and “non-payroll” (i.e. copy of current business rent or lease agreements and payments, invoices for business utilities)

  3. Submit appropriate forgiveness forms and documents to your lender.

  4. Communicate, communicate, communicate. Now, much of the onus of this step largely falls on your lender. The loan organization must notify you of the SBA’s decision, following the agency’s review of your loan. Your lender will communicate both the amount of the loan that is forgiven, as well as the date payments must first start to be made (if you are still on the hook for the loan). You do have the right to appeal the SBA’s decision.

Do not miss out for a great opportunity to secure funds when you need them most, either loans that will be fully forgiven or loans at extremely favorable rates. During this second round of PPP funding, smaller organizations have “first dibs,” and may apply for loans by March 9. Eligible “early bird” applicants include sole proprietors with no more than 20 employees. All other eligible applicants have until March 31 to apply for this latest iteration of the program, which reportedly allowed for fresh funding of $284 billion as of January. Along with the new round of funding came with refined requirements, including adjustments related to the size of the qualifying organizations and the requirement that successful applicants must document a Year-on-Year decrease in revenues of 25-plus% for one “reporting period” in 2020. More information on the application and forgiveness process and requirements can be found here, and by reaching out to us!

Since 1951, O’Donnell, Ficenec, Wells & Ferdig has been helping organizations throughout the Midlands navigate the ups and downs of operating a business. More recently, we have helped clients to successfully navigate the Paycheck Protection Program process, providing peace of mind as entrepreneurs explore options to sustain their business through never-before-seen changes.

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