The Paycheck Protection Program (PPP) was established when the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27. The U.S. Small Business Administration (SBA) was tasked with implementing this massive program to help "businesses keep their workforce employed during the Coronavirus crisis." The program has been credited with keeping millions of Americans off the unemployment rolls during the early period of the pandemic. In fact, this newspaper previously reported that 2,669 loans were awarded in Boone County. Here are some facts business owners should be aware of if they have taken (or are considering taking) a PPP loan.
First, while some commentary may have led outside observers to view the program as free money to small businesses, the essence of the program is a low interest loan. PPP loans have an interest rate of just 1% and loan payments are deferred for six months. Loans issued prior to June 5 have a maturity of just two years unless the borrower and lender agree to extend the term of the loan to five years. Loans issued after June 5 automatically have a maturity of five years. No collateral or personal guarantees are required to obtain the loan.
If a business owner wants a loan forgiven, they must meet all eligibility requirements and complete the Loan Forgiveness Application (SBA Form 3508 or 3508EZ) and submit it to their lender. From that point, the lender has 60 days from the receipt of the application to determine if the business is entitled to full or partial loan forgiveness and communicate that decision to the SBA.
The PPP Flexibility Act, signed into law on June 5, modified many of the requirements set up when the program was hurriedly established. For example, businesses initially had to use at least 75% of the loan amount for payroll costs if they wanted to qualify for loan forgiveness, but under the Flexibility Act that number was reduced to 60%. Borrowers who use less than 60% of the total loan proceeds toward payroll costs may be eligible for partial loan forgiveness.
The Flexibility Act also extended the borrower’s time to use the funds from an eight-week period immediately following the disbursement of loan proceeds to 24-weeks — not to extend beyond the end of 2020. Loan proceeds are designed to cover 75 days of payroll costs, but businesses were only given eight weeks to use the funds for payroll costs before they applied for loan forgiveness. The updated rule allows a 24-week covered period that makes it easier for businesses to potentially use 100% of the loan proceeds toward payroll costs, simplifying the loan forgiveness process.
One interesting part of the PPP application requires all borrowers to certify in good faith that "current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." This sentence created a lot of discussion on what constituted "necessary" versus what was simply beneficial to the small business requesting the loan. Nearly every small business could claim a sense of economic uncertainty — both early in the pandemic and even today — but the SBA seems to make it clear that "necessary" is a distinct requirement.
To alleviate the fear that some business owners had regarding this requirement (and in recognition of the impossibility of reviewing over five million loans) the SBA has stated, "Any borrower that received PPP loans with an original amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith." Given that the average loan size is about $103,000, most loan recipients will fall into this category.
If a business took out a loan of at least $2 million, they should expect some scrutiny regarding whether the loan was "necessary" as the SBA has stated they will review all these loans. The penalties for making a false statement on the loan application can be severe; however, because much of the guidance on the loans has been vague at best, the likelihood of businesses being punished — beyond denial of loan forgiveness and being required to repay the loan as issued — seems remote.
The Paycheck Protection Program reopened to applications July 6 and is currently scheduled to end on Aug. 8. Any interested business that has not applied already should act quickly. Further information about this program and other coronavirus relief options for small businesses is available at sba.gov.
Tim Sullivan is the owner of Clarity Financial LLC, a fee-only advisory firm in Columbia, a CFP practitioner and member of the National Association of Personal Financial Advisors and has earned the Enrolled Agent designation from the IRS.