When it launched in April 2020, demand for Paycheck Protection Program (PPP) loans was high. After less than two weeks, the $349 billion initially allotted to the program was gone. The high demand led to an increase in the funding available, and later, a second draw period, during which companies that had received funds initially and companies who hadn’t could apply for the PPP loans.
The aim of the loan program was to help businesses keep people on their payrolls in the midst of the pandemic. Companies that complied with certain rules and used the money in certain ways are able to apply for forgiveness of the debt. Depending on when your company received the loan, it might now be time to start the forgiveness application process. Here’s what you need to know about applying for PPP loan forgiveness.
Loan Forgiveness Requirements
The Small Business Administration (SBA) has outlined the requirements a company needs to meet to have its PPP loan forgiven. How your business used the money determines whether it qualifies for forgiveness or not. Some expenses that make your company eligible for forgiveness include:
- Mortgage insurance
- Repairs to a building due to property damage
- Covered expenses such as spending on protective gear for employees or software to upgrade your systems
Initially, companies needed to spend at least 75% of the loan on payroll costs. An update to the PPP reduced the requirement to 60% of the loan.
Along with using the funds for approved expenses, a company applying for forgiveness needs also to have kept up its compensation and maintained the same number of employees it had before the pandemic began. The loan program has some exceptions for companies that might have laid people off at the start of the pandemic and been unable to rehire them later on. If the ratio of full-time employees employed pre-pandemic to full-time employees employed during the pandemic is 1, the company is eligible for forgiveness of 100% of the loan value. If it’s less than 1, the forgivable amount is adjusted.
In addition to maintaining the number of employees on your team, your company also needs to have maintained their salaries. If you reduced salaries by more than 25% (for people who earn less than $100,000 annually), you won’t qualify for forgiveness.
The last requirement for forgiveness is that the company needs to spend the money between a designated coverage window, between eight and 24 weeks after getting the funds.
How to Start the Application
Eligible businesses need to start the forgiveness application process within 10 months of getting the loan. Your company should work with the lender that issued you the loan to complete the application. To get started, you’ll want to contact the lender to request the appropriate form. Your lender will provide you with SBA Form 3508, SBA Form 3508EZ, or SBA Form 3508S depending on your situation.
Along with completing the appropriate form, you’ll need to provide documentation to prove your company’s payroll and other qualified expenses during the covered period. Examples of documentation you might provide include payroll tax filings, your current lease and copies of canceled rent checks, account statements from your mortgage lender, and copies of your utility bills.
You’ll send the documentation and the SBA form to your lender, who will forward it to the SBA for review. The lender will let you know if additional documents are needed and will tell you the SBA’s decision. If your application is denied, you might be able to appeal the decision.
What to Do if Your Company Doesn’t Qualify for PPP Loan Forgiveness
Your business might not qualify for PPP loan forgiveness for several reasons. If you’re not eligible for forgiveness, you’ll need to start making payments on the loan at the 10-month mark. Your interest rate is 1%, and you’ll have either two or five years to pay the loan off, depending on when you received the money. You’ll make the payments directly to your lender.
Having your PPP loan forgiven can help your company stay afloat or continue to grow even in the midst of challenging times. If you’re wondering what your company’s next steps should be, the virtual CFOs at New Direction Capital can help. Contact us today to learn more about how we can help you realize profitable growth.