The U.S. Department of the Treasury recently announced rules required for business owners to make use of the Paycheck Protection Program’s (PPP) loan forgiveness feature. The updated guidance provides both challenges and opportunities for local business owners.
And while the program confirmed many things that were expected, such as the requirement that 75% of costs be used for payroll, it also provided some surprises and failed to address several open questions. Local business owners and lenders alike have been anxiously awaiting these rules. The hope is that these rules will help business owners as they tackle the important things necessary to help save the livelihoods of their businesses, employees and communities.
Here are some of the key points business owners should be aware of from the latest round of updates:
Clarity on taking the loan in “good faith”: Smaller loans of less than $2 million are given “safe harbor” from the Small Business Administration (SBA) and deemed to meet the good faith standard regardless of having savings or credit elsewhere. For those with larger loans, borrowers will be given the opportunity to document and to show the SBA why they felt they needed the PPP loan.
Time period flexibility for payroll: Business owners are now given the option to use an 8-week period that more closely aligns with their payroll cycle as well as leaves open the possibility for including any deferred pay from prior cycles (but, unfortunately, not pay that has already been paid).
Exceptions for FTE reductions: The SBA will allow for exceptions in workforce reductions for those who were (a) laid off but refuse to come back to work, (b) fired with cause, (c) voluntarily resigned, or (d) requested and received a reduction in hours.
Expanding the definition of rent and prepayments: The forgiveness application adds broader language that possibly allows lease payments for capital or equipment rentals as well as the ability for borrowers to include rent and utility costs that happen on or before the next regular billing date, even if that date is outside the 8 weeks.
The forgiveness formula is complicated: Business owners will go through more than a dozen steps, many times on an individual employee basis and comparing several different time periods. Business owners will need to maintain clear documentation for up to six years. Ultimately, the forgiveness amount will be the lesser of (a) the original loan principal amount, (b) payroll costs over the 8 weeks divided by 0.75, or (c) a formula that takes the sum of allowable costs spent during the 8 weeks and reduces that figure based on reductions in wages or the number of FTEs.
Owners should continue to closely monitor this application process to learn how your business can navigate the COVID-19 crisis.
Michael Toth is senior vice president of wealth management for UBS in Grand Rapids.