Many small business owners who received Paycheck Protection Program loan funds are now asking themselves an important question: Should they apply for forgiveness now or later? Here are some important things to consider.
Recipients who received funds before June 5 have a choice of whether to ask for forgiveness either eight or 24 weeks from the date the funds were deposited in their account. Those who received funding on June 5 or later have the 24 weeks to spend the funds.
How does the Paycheck Protection Program work?
Created under the Coronarvirus Aid, Relief and Economic Security (CARES) Act, the PPP offers small businesses a forgivable loan to cover eight weeks of payroll, plus an additional 25% of that amount for business rent, business mortgages, business mortgage interest or business utilities, provided they kept their employees on payroll or called them back.
Under a set of interim final rules issued May 22, small business owners were given eight weeks from the time the loan was disbursed or from the first day of the payroll period in the covered cycle to use the money, or the loan would not be forgiven.
Under subsequent legislation known as the Paycheck Protection Program Flexibility Act of 2020, signed by President Donald Trump on June 5, the SBA reopened applications for the PPP on July 6. The “covered period” was extended from eight to 24 weeks of origination – or Dec. 31, 2020 – whichever is earlier.
The law also made it easier for owners who didn’t need all of the money for payroll or were not able to apply it to payroll because they were not opened to allocate it for other purposes. It said they could use up to 40% of the money for other eligible costs – up from 25%.
PPP loan forgiveness: 3 things to consider
1. Will there be more changes to the program?
The SBA posted the PPP loan forgiveness application on its website on June 16, so it is possible to start applying for forgiveness now.
Should you go ahead and apply now, if you think you have used the funds properly? Many business owners don’t like having debt on their books and would like to know the loan has been forgiven ASAP.
However, it may be worthwhile to wait. It is possible that as the pandemic continues, further legislation may result in changes to the program that make it more favorable to small business owners.
In addition, the forgiveness form has already been revised since it was initially issued in May (the most recent version was issued June 24). If more changes are made to improve the program, it is possible that earlier filers may not benefit from them.
2. Is your bank ready?
Another factor to consider is the readiness of your bank. Not all banks are set up to take forgiveness applications yet. It is banks that will be processing them.
For instance, Chase recently sent out a notice saying it continues to incorporate the latest SBA guidance and plans to start accepting online PPP forgiveness requests no sooner than mid-August. If you are not sure where your bank stands, it is best to contact your banker.
3. Have you spent the funds?
The most important consideration, though, is whether you have spent the eligible funds.
If your business could not open until very recently or is still not allowed to operate due to outbreaks in your state, then you may have had layoffs or furloughed employees.
If you have not used all of the funds allocated for payroll and other business expenses, it pays to wait until you can, as long as you can use them by the program’s deadline. Payments are, for most borrowers, deferred until 10 months after your eight-week or 24-week period.
See related: How to pay off business debt
Should you apply during your deferral period?
This could affect how soon you have to start making payments. If you apply for forgiveness during the deferral period, you won’t have to start making payments on any part of the loan that was not forgiven until the SBA makes a decision on your loan forgiveness request.
If you don’t apply during this period, you will automatically have to begin making payments after the deferral period ends. The interest rate on PPP funds is very low – only 1% – but loan payments can take a bite out of your cash flow, so it’s important to take that into account.
Congress has extended the PPP application period to Aug. 8. If you plan to apply, it pays to have your bookkeeper or accountant to get your books in order. Lenders need to understand how much money your business actually makes and how much you pay yourself and any employees.
When in doubt, ask your accountant. Every entrepreneur’s situation is different, but given how critical the PPP has been to business survival, many small business accountants are, fortunately, on top of the details.