Over the past several weeks, thousands of businesses have applied for and (some) have received the Small Business Administration’s Paycheck Protection Program loan. An attractive condition of this loan is the potential it to be forgiven. However, the SBA has continued to issue guidance on how to remain eligible for forgiveness, and there are strict protocols that businesses must follow.
What is Included in Loan Forgiveness?
The PPP Costs period begins to run on the day that the loan fund is received. From that day, the SBA begins counting 8 weeks for forgiveness’ purposes. During these 8 weeks, the SBA requires that no more than 25% of the forgiven amount be used for non-payroll costs. This means that 75% of the forgiven amount must be used to pay employees. As a general rule, the amount you spend on payroll during these 8 weeks should match your First Quarter’s (Q1) payroll amounts submitted to the SBA along with your application. For example, if your business had 28 employees on the January 2020 payroll, has received PPP loan funds, and now has 26 employees on payroll, your business needs to either hire 2 more employees to match your Q1 payroll, or return the funds equivalent to those 2 employees upon conclusion of the 8 weeks following disbursement of funds.
Most importantly, loan forgiveness is not automatic. Your business must request it, and your lender is not required to remind you of it. Accordingly, after receiving the loan, you should to implement procedures to ensure compliance in order to obtain forgiveness.
Steps to Ensure Loan is Properly Used
Keep in mind that it is entirely the business’s responsibility to track its expenses and how it manages the loan proceeds. Your lender has no obligation to evaluate how you have used the loan, or to decide if you are compliant with the SBA’s loan forgiveness requirements. Instead, the lender will deliver the documentation you provide, and submit it directly to the SBA, who will in turn determine whether the loan is eligible for forgiveness.
Once that documentation is submitted, it cannot be revised, supplemented or amended. The SBA’s determination as to the business’s compliance is final. It’s best to track your management of those funds on a week by week basis, and to continually appraise your compliance with the Program’s terms for forgiveness.
