La Verne: Using Your PPP Loan To Receive Full Forgiveness

Press release from the La Verne Chamber of Commerce:

May 04, 2020

On the surface, the guidelines for obtaining full forgiveness from your lender are straightforward.

Spend at least 75% of your loan proceeds on maintaining your payroll. That means paying your staff rather than laying them off, or rehiring the staff that you already laid off at a wage similar to what you were paying them before. You can spend the other 25% of your loan (or less) on rent, mortgage interest, and utilities. All other uses of your loan are, as of this writing, ineligible for forgiveness. Use your loan within eight weeks of receiving the funding.

Be sure to document the use of your loan proceeds throughout that eight-week period and be ready to present evidence of how you spent your loan to your lender. When it comes time to apply for forgiveness, you’ll need to show documentation that backs up your claims.

Loan forgiveness is not a binary thing, however. Your loan forgiveness can be reduced if you don’t spend your loan exactly as described above, but you will still receive some level of forgiveness if you use your loan on eligible costs. Spend all of your loan money on rent? That’s fine, but at most you’ll receive 25% loan forgiveness.

There are other eligible uses for your PPP loan, including costs related to funding healthcare benefits and insurance premiums, and interest on debt that you’ve incurred before February 15, 2020. These costs are not forgivable, however. You also don’t have complete free rein with your loan—you can’t use it, as far as most analysis of the CARES Act has determined, to expand your operations or renovate your brick-and-mortar locations, for example.

Paying Off Your PPP Balance If Necessary

For some businesses, that scenario—receiving, at most, partial loan forgiveness—isn’t a bad thing.

That’s because the terms of PPP loans are incredibly generous. With a 1% interest rate and loan payments deferred for six months, a PPP loan is the lowest-cost source of capital that any business could hope to obtain.

Consider the PPP loan in comparison to what was previously considered the gold standard of small business financing: The SBA’s 7(a) loan. Interest rates for the 7(a) loan are as low as the market prime rate plus 2.25%.

Granted, 7(a) loans go up to $5 million (compared to $2 million for PPP loans), can be used for a wider variety of purposes—such as expansion, renovation, and working capital needs—and have longer repayment terms. But they come with fees, often require collateral, and have more stringent requirements such as showing profitability, a good credit score, and sufficient time in business.

If the 7(a) loan was previously the best kind of loan that a business could hope for to obtain additional liquidity, the PPP supplants it—assuming you decide to use it as a loan, and not a grant. You’ll have two years to repay your PPP loan, but at a measly 1% interest, which for some may be a more useful way to utilize this loan than on payroll during an uncertain time when large portions of American life remain restricted.

Some businesses have reported feeling as though the 25% allotment for rent, utilities, and mortgage interest isn’t enough to meet their needs if they want forgiveness. New York City-area businesses, for example, pay a premium for brick-and-mortar space, and may find that using their loan for many months of rent rather than rehiring their staff right away is a more sustainable path forward.

Keep in mind, not receiving full forgiveness for your PPP loan is not the same as defaulting on your loan. Defaulting on your loan can seriously damage your credit report and make it difficult for you to obtain more financing in the future—especially government-backed funding.

Instead, consider how just partial forgiveness of your loan can provide you with low-cost financing for a period while you wait to see which direction the economy is moving. Nothing in your loan application requires you use your loan solely on the forgiveness-eligible expenses, and not seeking forgiveness is within your rights as a business owner here.

Just be careful to limit your use of your PPP loan to eligible costs, as described above. Knowingly using your PPP loan for unauthorized purposes may make you liable for criminal charges, so consult with a CPA or other financial expert before moving ahead.

The bottom line is that not receiving full PPP loan forgiveness does not portend doom for your business. This use of the PPP loan may not be exactly how Congress intended it be used when the CARES Act was passed, but as we continue to come to grips with the long-lasting effect the coronavirus pandemic will have on our society, it may turn out to be the more salient move for businesses that are thinking long term.

This article from Forbes.com, April 30, 2020
by Jared Hecht, Contributer
Full article here

La Verne Chamber of Commerce

• Leah Skinner Executive Director
• May 04, 2020
• (909) 593-5265
• Send Email

This press release was produced by the La Verne Chamber of Commerce. The views expressed are the author's own.