Your business may still qualify for partial loan forgiveness even if you can't match the federal ... [+]
Much has been made about the possibility that businesses could have their Paycheck Protection Program (PPP) loan fully forgiven—if they meet certain criteria for how they spend the money. But the loans, created earlier this year as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, were deemed too restrictive by some businesses struggling to qualify for forgiveness.
New SBA guidelines, however, have loosened forgiveness restrictions, and are intended to make it easier for businesses to receive partial loan forgiveness if they don’t meet full PPP loan forgiveness requirements. These guidelines, further clarified this week, could increase the appeal of a PPP loan for businesses that haven't yet applied.
Guidelines Follow New Legislation Meant to Ease Restrictions
The clarifications come following new legislation approved earlier this month that relaxed many of the forgiveness restrictions. The Paycheck Protection Flexibility Act mandates that businesses use 60% of their PPP loan for eligible payroll costs—down from 75%—to remain eligible for full loan forgiveness. Businesses now also have 24 weeks instead of eight to use those funds, all of which must be spent by Dec. 31.
Some expressed concern the latest rules meant that partial loan forgiveness was not an option for businesses that use less than 60% of their PPP loan on payroll expenses. But U.S. Treasury Secretary Steven T. Mnuchin and Small Business Administration (SBA) Administrator Jovita Carranza confirmed in a joint statement this week that businesses that spend less than 60% of their loans on payroll will be eligible for partial loan forgiveness as long as at least 60% of the amount forgiven went to payroll.
This means that a business that received a $100,000 loan, and used $30,000 on payroll expenses, would be eligible to have $50,000 of their loan forgiven, assuming all other criteria was met.
Critics of the original terms say the rules unfairly penalized business owners whose employees were unwilling to return to work. Thousands of businesses ended up returning their loans, some out of concern that they weren’t entitled to the funds or wouldn’t be able to meet the criteria for forgiveness.
PPP Loan Funds Are Still Available
Although the first batch of $349 billion in PPP funding ran out in less than two weeks, the second allotment of $310 billion has seen considerably less demand, likely due to controversy over how the money was distributed and concerns over the feasibility of qualifying for loan forgiveness.
According to the SBA, more than $510 billion in PPP loans had been granted as of May 30, which suggests that roughly $149 billion is still available to potential applicants. The deadline to apply for a PPP loan is June 30.
The original PPP rules included a requirement that recipients use at least 75% of the loan on payroll costs within eight consecutive weeks of receiving the loan. They also required borrowers to maintain the same headcount and compensation levels as they had prior to the pandemic, or to rehire laid-off employees within a certain time frame. The remaining 25% of the loan could be used for mortgage interest payments, rent payments and/or utility payments.
If partial forgiveness might be a better fit for you, know that the portion of your loan that’s not eligible for forgiveness will be treated as a five-year loan at an interest rate of 1%. Although that’s not the same as having your loan entirely forgiven, those terms are still far cheaper than many other types of coronavirus-related small business loans.
