4 Sure Signs Your PPP Loan Will NOT Be Forgiven

Kylee Wooten
April 30, 2020
Read Time: min

Parameters for full PPP forgiveness

This week, a new round of funding was made available for Paycheck Protection Program (PPP) loans. While it’s been a mad dash to secure funds for small business borrowers, the work is far from over once the loans are issued. Eligibility for loan forgiveness has been just as confusing – if not more so – than securing a PPP loan. 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. The interim final rule and other FAQs released by the SBA and Treasury address some forgiveness qualifications, but many lenders are waiting for additional guidance from the SBA. While there are many unanswered questions to this point, the CARES Act and FAQs have set some specific parameters that borrowers must follow in order for their loans to turn into grants.

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 provide ample documentation to prove the loan was spent on approved expenses.

According to the Treasury information sheet for borrowers, to request loan forgiveness the borrower must include:

  • Documents that verify the number of full-time equivalent employees and pay rates
  • Documents on payments made for eligible mortgage, lease, and utility obligations
  • Certification that the documents are true, and that the borrower used the forgiveness amount to keep employees on the payroll and make permissible payments

Employee and compensation levels are not maintained

The purpose of the PPP is to provide eight weeks of 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 in 2019, loan forgiveness will decrease.

If a business had to reduce its number of employees between Feb. 15, 2020 through April 26, 2020, then it must restore or rehire employees no later than June 30, 2020 to avoid decreasing the amount of loan forgiveness, according to the PPP information sheet for borrowers.

The vast majority of states have issued stay-at-home orders or similar measures, which have closed down many “non-essential” businesses. Business owners have voiced their concern that laid-off employees may not want to – or may not be able to – return to work. It’s important to note that these levels are based on numbers, so the exact employees that were on the business’s payroll do not have to remain on the payroll to have the loan forgiven, but the business must either keep or rehire to meet its pre-COVID-19 FTE headcount and compensation. Another important consideration to make is that while the delayed rehire date won’t cause issues with the employee retention portion of forgiveness, it may cause the business to spend less than the required 75% threshold on payroll costs and would result in a reduction in the amount of the loan forgiven.

Get the latest information regarding the CARES Act and the Paycheck Protection Program
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At least 75% 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 75%, anyway. PPP funds are calculated to equal 2.5 months of a business’s 2019 payroll, and the borrower has eight weeks to spend the loan; therefore, the borrower will have an excess of funds to spend on permissible expenses, such as rent, utilities, or mortgage interest. Other payroll costs include medical or sick leave, health care benefits, and payments for retirement benefits.

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, such as inventory. While it could be tempting for businesses like restaurants, where inventory has gone bad, to use the loan to “reimburse itself,” the SBA will direct the borrower to repay the amount of funds used for unauthorized purposes. Furthermore, the interim final rule states that if a borrower “knowingly uses the funds for unauthorized purposes” he or she will be 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 now they’re returning the funds – or they could face other consequences beyond simply paying back the loan. 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 FAQ clarifies that the loans were not intended for companies with access to equity in the market. Borrowers that received loans prior to the issuance of the latest FAQ have until May 7, 2020 to repay the loan in full. More than $160 million of the nearly $900 million received by public companies that have disclosed PPP loans has been returned.

While the formula for determining how much a borrower will owe if the loan is not used properly is yet to be determined, borrowers should be sure to avoid the above scenarios to have their loans forgiven. It’s also important to note that other lending options are available to business borrowers, such as the Main Street Lending Program, to help businesses weather the economic shock caused by the coronavirus pandemic. For additional information on PPP lending resources, please visit the CARES Act and Paycheck Protection Program resources page.

About the Author

Kylee Wooten

Kylee Wooten is a content marketing manager at Abrigo.

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