In April 2020, to help small businesses impacted by COVID-19, the U.S. federal government launched a new Small Business Administration (SBA) lending program – the Paycheck Protection Program (PPP). Paycheck Protection Program loans are designed to help small businesses keep employees on their payroll and come with the option for full or partial loan forgiveness. In June 2020, Congress passed the Paycheck Protection Program Flexibility Act, which adjusted some of the terms of the existing PPP, providing far greater flexibility for small businesses, particularly as it relates to the loan forgiveness.
If you’re thinking about applying for a PPP loan or already have one, you’re likely wondering how these changes might affect you and your business. Keep reading for more details on the changes included in the Act, and how they affect your existing PPP loan. Please note that OnDeck is no longer accepting new PPP loan applications.
What is the Paycheck Protection Program (PPP)?
SBA PPP loans provide small businesses who have been impacted by COVID-19 with financial assistance. These loans are backed by a federal loan guarantee. The federal government allocated approximately $650 billion to this program.
One of the goals of the PPP is to incentivize small businesses to keep employees on their payrolls during the COVID-19 crisis. As such, borrowers are permitted to use PPP loan proceeds to cover payroll costs (including benefits), rent payments, utility payments, interest on mortgages and interest on debt obligations incurred before 2/15/2020.
In addition, borrowers are eligible to have up to their entire loan amount forgiven, if they use the proceeds to cover allowable costs at permissible ratios (see below) and maintain numbers of employees and their compensation levels. One of the key drivers of how much of a loan can be forgiven is whether the business borrower is able to maintain employee headcount and salary levels during the outbreak and/or restore headcount and salary levels before the end of the year.
Under the original program, there were strict requirements to qualify for full loan forgiveness. Among other changes, the Paycheck Protection Program Flexibility Act loosened restrictions on the loan forgiveness process, further assisting small businesses as the start to re-open and re-build.
How does the Paycheck Protection Program Flexibility Act change the PPP?
The PPP Flexibility Act made a number of changes to the existing loan program, most of which apply to both existing and new PPP loans. For those who have not yet applied for a PPP loan, please note that, under current guidance, new loans will not be available after June 30, 2020. Here’s a quick overview what else was included in the recent Act:
Term length increased
For any new PPP loans (i.e., those approved by the SBA on or after June 5, 2020), the term length was extended to 5 years. PPP loans approved by the SBA before June 5, 2020 will maintain a term length of 2 years.
The payment deferral period for all PPP loan holders, irrespective of when your PPP loan was approved by the SBA, has been extended beyond the original 6-month deferral period. Under the new law, all loan payments will be deferred until your loan forgiveness application is approved by the SBA and the forgiveness amount is remitted by the SBA to the lender. If the borrower does not apply for loan forgiveness within 10 months of becoming eligible for forgiveness (i.e., 24 weeks after loan disbursement), then the borrower must begin making loan payments on the full loan amount, including any accrued interest.
As an example, if you took a loan on May 1, your covered forgiveness period will end on August 31, 2020 (24 weeks from the date you received your loan). If you fail to apply for loan forgiveness by June 1, 2021 (10 months later), then you will have to begin paying back your PPP loan in full, on a monthly basis.
The PPP Flexibility Act also made a number of changes to the existing guidance on loan forgiveness, including:
- At least 60% of the loan amount must be used to cover payroll expenses– originally, 75% of the loan amount had to be spent on payroll.
- Any reduction in employee headcount or compensation levels may be reinstated by December 31, 2020, extended from the original deadline of June 30, 2020. If reinstated by such date, the headcount or compensation reduction will not impact your forgiveness amount.
- PPP loan funds must be spent within 24 weeks of loan disbursement in order to qualify for forgiveness. Originally, funds had to be spent within 8 weeks of loan disbursement to be eligible for forgiveness. If you have an existing PPP loan approved prior to June 5, 2020, you can choose to either keep the original 8-week timeline or switch to the extended 24-week period in order to maximize your ability to qualify for 100% forgiveness of your PPP loan (and to extend your deferment period).
Originally, small businesses with a PPP loan were not eligible to delay payroll tax payments, a new tax break included in the CARES Act. PPP borrowers can now take advantage of this tax break. However, please note that PPP borrowers are still not eligible for the 50% payroll tax credit that was created under the CARES Act.
What does this mean if I already have a PPP loan?
If you received a PPP loan before June 5, 2020, most of these changes will retroactively be applied to your loan. This means that you are now able to use your PPP loan for expenses incurred during the 24-week period after loan disbursement, rather than the original 8-week period, and still have those funds eligible for forgiveness. You can also now use up to 40% of your funds on rent, utilities, or interest on a mortgage, rather than the original, more limiting 25% cap on such non-payroll expenses.
We encourage all PPP loan holders to take advantage of the longer forgiveness period for PPP expenses in order to maximize your ability to qualify for 100% forgiveness of your PPP loan. Additionally, because your payment deferral period is now tied to approval of your forgiveness application, borrowers should be aware that opting for the 24-week forgiveness period will also have the practical effect of extending your payment deferral period. As a reminder, repayment of your PPP loan will only begin once your forgiveness amount is approved by the SBA or, if you chose not to apply for forgiveness, then 10 months after the expiration of the new 24-week period.
Important Note: the new term length of at least 5 years will not apply to any PPP loan approved before June 5, 2020. Your loan will still mature in 2 years.
I don’t have a PPP loan yet – how do I apply for one?
The SBA PPP loan program runs through June 30, 2020. Visit the SBA’s website to find an approved lender and for more information.
OnDeck is here to support small businesses – check out our COVID-19 Resource Hub for more helpful information for small businesses impacted by COVID-19.
*This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for health, tax, legal or accounting advice. You should consult your own health professionals or tax, legal and accounting advisors before implementing any business changes.