Paying Off Your Ppp Balance If Necessary
For some businesses, that scenarioreceiving, at most, partial loan forgivenessisnt a bad thing.
Thats because the terms of PPP loans are incredibly generous. With a 1% interest rate and loan payments deferred for six months, a PPP loan is the lowest-cost source of capital that any business could hope to obtain.
Consider the PPP loan in comparison to what was previously considered the gold standard of small business financing: The SBAs 7 loan. Interest rates for the 7 loan are as low as the market prime rate plus 2.25%.
Granted, 7 loans go up to $5 million , can be used for a wider variety of purposessuch as expansion, renovation, and working capital needsand have longer repayment terms. But they come with fees, often require collateral, and have more stringent requirements such as showing profitability, a good credit score, and sufficient time in business.
If the 7 loan was previously the best kind of loan that a business could hope for to obtain additional liquidity, the PPP supplants itassuming you decide to use it as a loan, and not a grant. Youll have two years to repay your PPP loan, but at a measly 1% interest, which for some may be a more useful way to utilize this loan than on payroll during an uncertain time when large portions of American life remain restricted.
How Small Businesses Still Reeling From Covid
COVID-19 has wreaked havoc on the American economy, forcing many business sectors to close entirely while reducing others to limited operation. These restrictions, combined with an unprecedented unemployment rate and limited consumer spending, have left many businesses contemplating filing for bankruptcy or on the brink of outright failure. Indeed, one survey discovered nearly 25% of small businesses are considering closing permanently as a result of the economic downturn, with another 12% facing likelihood of bankruptcy.
These grim numbers persist despite the United States governments attempts to limit the economic impact of the pandemic, primarily through EIDL and PPP loans offered through the CARES Act legislation passed in March 2020. Millions of small businesses procured hundreds of billions of dollars in loans and grants yet still face extinction.
The business owners granted PPP loans are now concerned about the consequences of shutting down or filing for bankruptcy. Below, we break down some of the basics on how outstanding PPP loans can affect the shuttering of your business.
Expenses Eligible For Loan Forgiveness
Eligible expenses were originally limited to payroll and operating costs, but the coronavirus relief bill passed in December 2020 expanded the list to include supplier costs, expenses related to health and safety enhancements and some property damage.
The following types of expenses now qualify for PPP loan forgiveness:
Payroll costs: This includes all wages paid, including tips, commissions and bonuses as well employer-paid benefits such as insurance, sick leave and retirement contributions. Compensation for employees earning more than $100,000 per year aren’t eligible for forgiveness.
Operating costs: This includes mortgage payments and interest, rent, utilities and business software, such as accounting, payroll or inventory management programs.
Supplier costs: The cost of goods essential to operating your business is eligible for forgiveness if the purchase order or contract was in place before the covered period. Purchase orders for perishable goods made during the covered period are also eligible.
Property damage: This is for repairs for damage or loss due to looting, specifically related to public disturbances in 2020. Costs covered by insurance aren’t eligible.
Worker protection: This includes personal protective equipment and other costs related to health and safety requirements, such as health screenings, installation of barriers or expansion of outdoor dining.
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How Long Do You Have To Pay The Ppp Loan Back
The entire loan is due in two years or five years . In both cases, you
The applications for forgiveness are made through your lender or through the PPP Loan Forgiveness Portal opened by the Small Business Administration.. If you don’t apply for loan forgiveness within 10 months after the last day of your covered period, you’ ll be required to start making payments to your PPP lender at 1 percent interest , which started accruing when the loan was made.. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.. PPP Loan Forgiveness Delays: The SBA and some PPP lenders are clashing over alleged delays in loan forgiveness.. Borrowers are able to defer paying back principal and interest on their PPP loans during the deferment period which, prior to the new rule, ended after the SBA issued a decision on the borrower’s loan forgiveness application.. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan , which is either two or five years from loan origination.. If there is evidence of fraud, people can go to jail for a $20,000 PPP loan , just like someone whose PPP loan was $100,000 or $1 million.
Allowable Use Of Funds
SVOG funds may be used for: payroll, rent, utilities, mortgage payments, debt, worker protection, independent contractors, ordinary and necessary expenses, administration, state and local taxes and fees, leases , insurance, advertising, and production costs
Grant funds may not be used for: buying real estate, making payments on loans originated after Feb. 15, 2020, making investments or loans, making contributions or other payments to, or on behalf of political parties, political committees, or candidates for election, or any other use prohibited by the Administrator
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What Happens If You Don’t Get Full Ppp Loan Forgiveness
Reviewing the particulars of the Paycheck Protection Program is crucial to your success.
The Paycheck Protection Program is in the middle of approving its second round of loans to small business owners affected by the coronavirus pandemic. A combination of unprecedented demand, technological shortfalls, and unclear guidelines have made it more difficult than anticipated for the money to reach the businesses most in need
As the SBA continues to approve loans through its accredited lenders, however, well increasingly turn our attention to the question of how these businesses can receive forgiveness for their loans. A key component of PPP loans is government forgivenessif businesses use these loans to cover payroll and other crucial costs over an eight-week period, the loans can be forgiven, effectively turning them into grants.
In a perfect world, no business would assume financial responsibility for abiding by public health recommendations and government restrictions. You should do what you can to get loan forgiveness.
The rules for PPP loan forgiveness are the same for every borrower, regardless of business size, location, or need. Thats why its worth understanding exactly what it means to obtain full loan forgiveness, and what happens if you dont get it. For some business owners, using PPP as a loan, rather than a grant, might be the preferred option.
You May Lose Employees Anyway
The primary purpose of PPP is to help employers keep employees on their payroll so they can be ready to return to work when business resumes. But some employers are finding that difficult to achieve, due to financial concerns, health concerns or both.
Traci shared her dilemma in response to a Nav article about PPP loans:
My employees are all part time and with the PUA and unemployment, they are making double being on this assistance. I was just approved for a PPP loan and no one wants to come back to work. What do I do? HELP!
Some employers have reported their employees stand to make more through Pandemic Unemployment Assistance than they would if hired back and paid using PPP funds. Other employees are afraid to come back into a workplace where they may be exposed to coronavirus.
And of course some workplaces are closed, or business is so slow that employers cant find meaningful work for their employees to do anyway. Its confusing and frustrating to employers to pay their workers not to work, or to try to find something for them to do.
If you offer employees their job back but they dont accept the offer to come back to work, they may lose unemployment benefits. Even if you do bring them back and they are making less money than they would have on unemployment, they may be resentful enough to look for another job in the future. Its a tough decision many employers are facing especially those with lower-wage employees.
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Are Ppp Loans Under $50 000 Automatically Forgiven
The SBA and the US Treasury have released a new forgiveness application for borrowers with Paycheck Protection Program loans less than $50,000. In addition to simplifying the application, a borrower can receive forgiveness for their loan even if they have laid off employees since receiving their PPP loan.
Referral Of The Debt To The Department Of Treasury
If you fail to respond to the 60 day notice sent by the SBA, the SBA will refer your debt to the Treasury for collection. The Treasury has many options to collect the debt. For instance, the Treasury could refer the debt to the Department of Justice to file a lawsuit against you. In addition to filing suit, the Treasury can garnish your wages, take your tax refund, take some or all of any federal payments due you .
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How The Lender May Try To Collect
When a government small-business loan goes into default, the lender will try to collect the full amount from the borrower, calling in the SBA’s guarantee only if its efforts to collect fail.
The lender has the right to seize the assets the borrower used as collateral to back the loan. This can include business bank accounts, inventory, equipment or real estate.
Banks are going to follow their normal policies and procedures to ensure that the collateral can repay the loan, Singer says.
Borrowers owning 20% or more of the business and individuals that hold key management positions are also required to sign a personal guarantee to obtain SBA loans. A personal guarantee is a written promise that says you agree to pay back the loan personally if your business cannot.
This means if the collateral the business owned doesn’t satisfy the loan amount outstanding, the lender has the right to try to collect on personal guarantees made by the owners of the business.
They can send demand letters to the guarantors, which seeks payment for the shortfall, and they could file a lawsuit in state court, Green says.
With a personal guarantee, lenders can look to liquidate the borrowers personal assets, such as real estate and bank accounts, but the laws vary by state, Singer says.
If you default and the lender takes a loss on the loan, it submits the loss to the SBA to honor its guarantee. The SBA guarantees up to 85% on loans of $150,000 and less, and up to 75% on loans over $150,000.
Referral Of The Debt To The Sba
In certain situations, especially when you have not pledged personal assets, the lender will conclude suing you as a personal guarantor is not worth the time or money. Thereafter, the lender will refer the debt to the SBA for collection. The SBA will send you a notice stating that you owe the debt. The notice will inform you that you have 60 days to pay or make other arrangements. Also, the notice will inform you that you have the ability to review documents related to your debt and a right to review if you believe you don’t owe the debt.
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Who Is Eligible To Apply For A Ppp Loan Through Square Capital
At this time, only businesses with a Square account will be able to apply through Square Capital. Sole proprietors, independent contractors, self-employed persons, and small businesses can apply. We are currently rolling out applications to sellers that receive the first PPP loan through Square Capital. You may be eligible for your second PPP loan if your business:
Received a first PPP loan through Square CapitalUsed or will use the full amount of their first PPP loanHas fewer than 300 employees. If your business is a hotel or restaurant, you must have fewer than 300 employees per locationExperienced at least a 25% decrease in revenue in a quarter in 2020 relative to a quarter in 2019 or during the year 2020 as compared to 2019.
We expect to roll out applications to sellers applying for their first PPP loan through Square Capital in March.
Talk To A Los Angeles Bankruptcy Attorney
If you dont qualify for PPP loan forgiveness and are unable to make payments, or those payments are throwing the rest of your budget into chaos, your next step should be to talk with an experienced Los Angeles bankruptcy attorney. At Borowitz & Clark, we offer free consultations to help you find the right solution for you. Schedule yours right now by calling , filling out the contact form on this page, or clicking in the bottom right corner of the page to chat with an agent.
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Can My Ppp Loan Be Forgiven In Whole Or In Part
Yes. PPP loans may be fully forgiven, meaning they do not have to be repaid. If you do not apply for forgiveness, you will have to repay the loan. Businesses have up to 24 weeks from the date you received the loan to spend the funds in a manner that is eligible for loan forgiveness.
- Businesses with loans up to $150,000 may use Form 3508S to apply for forgiveness. This application has fewer calculations and does not require borrowers to submit documents with their forgiveness application. If you are eligible to use Form 3508S, you wont need to submit documents showing your eligibility for forgiveness with your forgiveness application.
- If you are not eligible to use the Form 3508S , you will need to apply for forgiveness using Form 3508EZ or Form 3508. To qualify to use Form 3508EZ, you must answer certain eligibility questions, like whether you decreased your employee headcount or hours during your Covered Period, whether you decreased employee wages by more than 25% during your Covered Period, or whether your business was unable to operate at pre-COVID levels due to COVID-related restrictions. If youre eligible to use Form 3508EZ, you will need to provide documentation evidencing that your loan was spent on expenses eligible for forgiveness however, you will not need to perform the employee headcount or wage reduction calculations that can reduce your eligible forgiveness amount.
If you applied for your PPP loan with a Form 940, 941, 944, or W-2.
What Will My Business Need To Apply
You can apply for your second PPP loan through Square Capital using the verified payroll information and documents provided with your first PPP application. However, you may need to upload an updated 2019 1040 Schedule C if you filed a different version with the IRS .
When applying for your second PPP loan, you should also be prepared to show that your business has experienced at least a 25% decrease in revenue in a quarter in 2020 relative to a quarter in 2019 OR in the year 2020 as compared to 2019. If your loan is less than $150,000 you will not need to provide documentation demonstrating your business revenue decline with your loan application however, you will need to provide documentation showing the revenue decline by the time you apply for forgiveness.
All businesses will also be required to verify their personal and business information with the following documentation, if so requested:
- Your businesss government issued SS-4 or
- Your most recent business tax returns confirming your business name and TIN or
- If you are a sole proprietor, your business name is the same as your first and last name and your TIN will be your Social Security number. Some sole proprietors may also register DBA names. If you have a DBA, youll be asked to provide it in the application. Find out your business entity type by taking a look at your tax returns.
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What Happens If You Cant Pay Back An Eidl Loan
EIDL loans arent able to be repaid. EIDL loans are able to defer as long as 30 months. EIDL loans that are approved for 2020, 2021 or 2022 can be deferred by up to 30 months from the date of the note. It is possible to make either complete or partial payments throughout the time, however it is not required.
You Have The Ability To Negotiate With Your Banks To Convert A Two
The earliest PPP loans were structured over a two-year period, with a 1% interest rate. Recipients didnt have to start making loan payments until 10 months after the end of a 24-week covered period. For example, if you received a PPP loan on May 1, 2020, your 24-week covered period would bring you to October 15, 2020. Ten months from there would bring you to August 15, 2021. Thats around the time when the banks are going to start to look for repayment. However, its important to note that when these repayment notices are received, the banks are only spreading your loan payments over approximately eight months! If you do the math, the loan was for a two-year period. By the time you reach the deadline to start applying for forgiveness, you only have approximately eight months left before you reach the end of that two-year period. Consequently, those loan repayment invoices are going to be relatively high.
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