Updated: New Law Provides More Flexibility for PPP Forgiveness

Editor’s Note: This article was updated on 6/8/2020 with additional details from the SBA.

The forgiveness potential of the SBA’s Paycheck Protection Program, which stated that loans would be fully forgiven if the funds were used for at least 75% payroll costs with the remaining dollars going to interest on mortgages, rent and utilities, made it an attractive option for small businesses struggling during the coronavirus pandemic. However many businesses soon realized there was a “catch.”

Meant to keep employees on payroll during the pandemic, the loan forgiveness terms didn’t make sense for businesses like restaurants that were – and continue – to operate on a reduced capacity, if at all.

The PPP loans initially opened on Friday, April 3. Flying without some of the regular “guardrails” of a traditional SBA loan as described by SBA Great Lakes Regional Administrator Rob Scott, the system was set up to quickly get money in the hands of small business owners. With initial language that stated “SBA will forgive loans if all employees are kept on the payroll for eight weeks,” the eight weeks since the first recipients received their money is rapidly approaching.

However, some relief has arrived. The Paycheck Protection Program Flexibility Act was signed by President Donald Trump on Friday, June 5. The Flexibility Act will extend the period a business has to use the funds, and lower the percentage they must dedicate to payroll.

To understand the relief the new law offers, first let’s look back and the initial plans for loan forgiveness.

For the first several weeks, small businesses took out loans with little guidance or information on compliance and the forgiveness process. The SBA didn’t release the PPP Loan Forgiveness Application until Friday, May 15. (Scott notes that the SBA is currently working with the Treasury department to update the Forgiveness Application and the additional details as released on May 15.)

The initial application stated that the first day of the Covered Period was the day the loan was dispersed. For example, if the business received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14. (With the exception that borrowers with a biweekly or more frequent payroll schedule could calculate payroll costs using the eight-week period that began on the first day of their first pay period following their PPP loan disbursement date – potentially buying a business a few weeks’ time.)

The origination date remains the same, but under the Paycheck Protection Program Flexibility Act, businesses now have 24 weeks, or until December 31 – whichever comes first – to use the money.

Additionally, the date to re-hire employees, another potential issues for businesses based on their ability to scale-up operations, has been extended from June 30 to December 31.

The new law also provides additional “safe harbors” in regards to re-hiring employees. As stated in a press release issued by the SBA:

  • Provide a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers that are unable to return to the same level of business activity the business was operating at before February 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to worker or customer safety requirements related to COVID–19.
  • Provide a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on February 15, 2020, and unable to hire similarly qualified employees for unfilled positions by December 31, 2020.

The other major provision stated that “75% of the forgiven amount must have been used for payroll.” Under the new law, that percentage has been reduced to 60%, with the remaining 40% still to be used for interest on mortgages, rent and utilities.

The maturity of loans issued on or after June 5 that do not qualify for forgiveness has also extended – from two years to five years. For those business owners that will be paying back loans, the deferral period has been extended from six months to 10 months after the end of the borrower’s loan forgiveness covered period.

While the state continues its phased re-opening, few businesses or industries are operating at normal capacity. The law provides more flexibility, however some businesses don’t stand to reap as much benefit from the changes as they are potentially days away from having used up funds if they received money early in the first round.

The initial $349 billion of funding appropriated by the CARES Act for PPP loans ran out on Thursday, April 16. Another $310 billion was allotted for the loans on Friday, April 24. As of Friday, June 6, approximately 4.5 million loans totaling $511 billion have been dispersed.

Initially anticipated to run out quickly, more than $135 billion remains from the second round of funding according to Scott. The SBA has discussed why loans are averaging lower in the second round, addressing initial concerns about large businesses receiving PPP loans – much of which was eventually returned. The feedback from the first round of funding provided more guidance for round two, with funds allocated for banks and financial institutions with a lower threshold of assets and loans over $2 million requiring review from the SBA.

While Scott noted that PPP activity has slowed over the last few weeks, the SBA is anticipating a surge in new applications with the introduction of more flexible terms. Businesses can find certified PPP lenders in the state of Ohio here. The final day a business can apply for a PPP loan is Tuesday, June 30.

As of June 6, Ohio small businesses have received 131,887 PPP loans totaling of $18,117,969,886.

For more information, visit sba.gov.