Understanding The PPP Loans

Posted: May 01, 2020 10:11 AM
Understanding The PPP Loans

Source: AP Photo/Sid Hastings

A lot of American small businesses are relying upon the Payroll Protection Program (PPP) sponsored by the Small Business Administration (SAB) to make it through the siege of COVID-19.

PPP was created to help small businesses continue to pay workers despite the government-ordered shutdowns as a result of COVID-19.  If small businesses meet certain requirements, the SBA said they will buy back the loans from the originating bank.

So far, Congress has authorized up to $659 billion for the SBA to buy back small businesses loans, although the Consumer Banker Association says they think that the demand for such loans will be about $1 trillion.

The first wave of applications, authorized at $349 billion, navigated the bureaucratic red tape fairly quickly. Consequently, Congress had to authorize another $310 billion last week.

While there has been rapid closing on the loans, the rules regarding what exactly a small business might need to provide the SBA to get loan forgiveness is still a bit murky to business owners.

The most important thing is to get organized before the loan closes.

Customers have to understand from the beginning what the money can be used for and organize their documents.

At least 75 percent of the loan amount must be used for payroll and benefits costs to qualify for 100 percent loan forgiveness, said the SBA guidelines. The other 25 percent can be used for documented rent, mortgage interest and utilities.

But there are several important caveats to this:

  • The borrower must not layoff any employees who were employed as of February 15th, 2020.
  • The company can bring back employees laid off prior to the PPP loan if they provide back pay for the worker to February 15th 2020.
  • The deadline for reinstating and paying workers is June 30th           .

Because the purpose of the loan is to benefit workers who would otherwise be laid off as a result of the government shutdown, PPP borrowers must maintain the same headcount and salary amount as of February 15th 2020.

  • The SBA will reduce loan forgiveness in same proportion as any headcount reduction.

If a borrower had 10 employees on February 15th 2020, and lays off one, then pays nine, then the SBA will only forgive 90 percent of the PPP loan amount.

It’s also important to note that the money being loaned right now is coming from banks, not the federal government. At the end of the eight-week period the bank must send the documentation the borrower provides them to the SBA.

On the basis of the documentation provided, the SBA, at its sole discretion, will decide to buy the loan from the bank or not.

If the SBA chooses not to buy the loan from the borrower, the loan will be converted into a two-year loan at 1 percent interest, payable to the bank.

While 1 percent interest is quite small, a two-year amortization would be pretty hard monthly nut for any small business needing a loan today.  So don’t trust experts who say don’t worry about getting the loan forgiven. A company requiring $100,000 in PPP loans would have to pay the bank $4,200 per month over 24 months at 1 percent interest to settle the loan.

So, as the man said: If you have a PPP loan, get organized now.

Borrowing for PPP is easy. But forgiveness is divine.