Lending & Credit Risk SBA Lending

4 Sure Signs Your PPP Loan Will NOT Be Forgiven

Kylee Wooten

April 30, 2020

0 min read

Key Takeaways

This article has been updated to reflect changes to the PPP and guidance from the SBA.

Parameters for full PPP forgiveness

With more funding available to the Paycheck Protection Program (PPP), lenders are refocused on originating new loans to help small businesses in their communities. But community financial institutions will tell you that even after the funds are exhausted, the work is far from over Eligibility for loan forgiveness has been just as confusing – if not more so – than securing a PPP loan since the program launched in April. The loan forgiveness process is one of the most important aspects of the program to both borrowers and lenders, and it is one of the biggest areas of uncertainty. Guidance has addressed some questions, but some of the rules to turn the loans into grants are changing under the Economic Aid Act.

Here are four signs your loan will NOT be forgiven.

Loan proceeds aren't documented

If a borrower does not take prudent measures to ensure that their loan proceeds are well-documented, there’s a good chance his or her loan will not be forgiven. Some lenders have recommended opening a separate bank account to hold the PPP funds, which will allow for easy tracking of expenses and documentation for how the funds are used. While it’s not required for borrowers to open a separate account, they must be able to provide ample documentation to prove the loan was spent on approved expenses. The SBA can review any loan of any size, and it has said it will be reviewing loans of $2 million or more.

Depending on the size of the loan, borrowers requesting forgiveness must submit documentation verifying eligible expenses. All borrowers must retain employment records and payroll documentation for four years and all other documentation for three years after the loan forgiveness application is submitted to the lender, and must make records available for SBA inspection on request.

Employee and compensation levels are not maintained

The purpose of the PPP is to provide cash-flow assistance to small businesses so that they are able to keep employees on the payroll. Therefore, if businesses reduce their average full-time equivalent employee (FTE) headcount or decrease employee compensation by more than 25% for any employee who made less than $100,000 annualized, loan forgiveness could decrease. Borrowers and lenders should carefully read requirements for forgiveness before applying for PPP loans to understand the requirements for maintaining employee payrolls and what exemptions might be available.

Get the latest information regarding the CARES Act and the Paycheck Protection Program

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At least 60% of the loan isn’t used for payroll, or the loan is used for non-permissible expenses

As the name of the program implies, PPP loans must be used to cover payroll – at least 60%, anyway. Borrowers can spend PPP funds over an 8 to 24 week period, using anything over 60% used by payroll on other permissible expenses such as business rent, utilities, or mortgage interest. Other eligible payroll costs include employer contributions to health insurance and retirement plans.

While this gives borrowers some latitude to determine how their loans are spent outside of payroll, borrowers cannot use their funds outside of forgivable categories. While it could be tempting for businesses to use the loan to “reimburse itself” for money lost during the crisis, the SBA will direct borrowers to repay the amount of funds used for unauthorized purposes. Furthermore, borrowers who knowingly use funds for unauthorized purposes are subject to additional liability, such as charges for fraud.

4. You have ample access to capital markets or substantial market value

Companies like Ruth’s Chris, Shake Shack, and the Los Angeles Lakers secured millions in the first round of PPP loans, but later returned the funds. The SBA and Treasury issued new guidance, stating businesses must “assess their economic need for a PPP loan” and certify “in good faith” that their request is “necessary.” Furthermore, the SBA clarified that the loans were not intended for companies with access to equity in the market.

For additional information on PPP lending resources, please visit the CARES Act and Paycheck Protection Program resources page.