It was a long time coming for a lot of small businesses seeking relief through the Paycheck Protection Program (PPP). Since they've the money and have read some of the fine print, some business people are finding that this program may not be a great fit for their specific circumstances.
If you have received a PPP loan but they are having doubts about whether or not it’s a good idea to keep the money, you are not alone.
Many Smaller businesses Are Finding that PPP Funds Aren’t The best Fit
With normal business patterns shattered right into a million pieces through the COVID-19 pandemic and associated lockdowns, many small businesses looked towards the PPP as a lifeline. Particularly appealing was the promise that companies would be able to possess the loan forgiven when they met specific criteria. But after a rocky rollout that took two separate rounds of Congressional funding (so far), the SBA is just just now formally releasing the specific guidelines and application for loan forgiveness. Early reports suggest a lot more than 30% of PPP borrowers have returned their funds so far.
Preliminary guidelines for PPP loans had revealed that the loans could be used to keep employee paychecks opting for 8 weeks. Forgiveness was determined by a minimum of 75% from the loan being used for payroll. Less, but nonetheless some, from the loan could be forgiven when the business decreased payroll by way of staff or salary reductions. The uncertainty by what these thresholds are, and what other outlays the cash does apply to beyond payroll, have many business owners questioning whether or not they made the best decision. Complicating matters further is some confusion between the PPP and also the SBA’s other major coronavirus intervention, Economic Injury Disaster Loans.
Reasons To come back Your PPP Funds
Not sure if you should keep or return the cash? Let’s look at some test cases.
1) You’ve Weathered The Crisis Pretty much And/Or Don’t Require the Money
While the pandemic has been a disaster for a lot of businesses, some were better positioned to pivot to the new paradigm than others. A smaller number may even have unexpectedly seen their sales go up. As this is all new territory for many businesses, no one could blame you for preemptively applying whenever you expected the worst.
The Treasury Department does require that borrowers certify in good faith that “current economic uncertainty makes this loan request essential to support the ongoing operations of the Applicant.”
The good news is that if you borrowed less than $2 million through the PPP, the SBA and Treasury Department have stated in their latest guidance that they'll assume you requested the borrowed funds in good faith. While you won’t have to worry about any legalities, you might still be thinking about returning the money to avoid paying interest.
If you borrowed $2 million or even more and aren’t certain you can convincingly demonstrate good faith, you need to return the funds immediately to avoid any potential auditing and legal troubles (at the very least, you won’t be eligible for a loan forgiveness and will also be expected to repay the borrowed funds). The “Safe Harbor” grace period to do so currently ends May 18, 2022.
2) You Don’t Think You Be eligible for a Loan Forgiveness
A 1% interest loan is nothing to sneeze at, however the fact remains that many PPP borrowers took out the loan with the expectation it would be forgiven. To qualify for full loan forgiveness, PPP funds could be used for:
- Payroll Costs: Capped at $100K/annually per employee, with sole proprietors and self-employed individuals also qualifying. No full-time salaries may be reduced by a lot more than 25%. Should you had to chop wages, you've until June 30, 2022, to revive the salaries. It had been expected that 75% from the loan’s value would cover payroll costs, including benefits.
- Mortgage Interest: Of the rest of the 25%, funds may be allocated to obligations incurred before February 15, 2022.
- Rent: Of the remaining 25%, funds might be spent to pay for rent payments for two months so long as the lease deal for the home was in effect before February 15, 2022.
- Utilities: Of the rest of the 25%, funds enables you to purchase bills.
You are, obviously, likely to provide documentation of your expenses. If you struggled to retain headcount and don’t see it going back to normal until July or later, you may have anticipated meeting the guidelines but fell short in practice. Whether it doesn’t seem sensible to have a loan on your books, you might want to return the funds.
3) You Don’t Think You are able to Pay The Loan Back In Two Years
If you don’t be eligible for a forgiveness, or only qualify for partial forgiveness, you’ll be tied to a payment loan. A 1% interest loan with a six-month deferment is, by objective measure, an absurdly good loan. That said, in case your business is struggling, you may not have the spare revenue to pay it back within that time. If so, it may make more sense to come back the funds, especially if you want to qualify for federal loans in the future.
4) Your PPP Loan Conflicts With Another Program
The confusing patchwork of CARES Act programs can be hard to navigate, particularly when you’re trying to figure out which of them are mutually exclusive. For instance, if you want to qualify for the Employee Retention Credit (ERC), you can’t also receive PPP funds. This can be especially annoying for companies that didn’t know of the ERC when they initially requested a PPP loan.
Luckily, you may still claim the tax credit should you return your PPP funds through the May 18 deadline.
5) You’re Not Will make It
The unfortunate truth is that it will probably require sometime for the economy to rebound and business revisit normal despite the lockdowns are gone for good. If your projections for the business aren’t looking great, you should ask yourself whether it seems sensible to carry this debt.
How To come back Your PPP Funds
Contact whichever lender by which you requested your PPP loan. They can show you with the procedure for returning your funds towards the Treasury Department. Keep in mind that the Safe Harbor provision expires on May 18, 2022, if you require leniency around the good faith provision, and/or you want to entitled to the ERC, you should begin the procedure immediately. Other borrowers who are considering returning their possess a a bit more time for you to make that decision.
FAQs On Returning PPP Funds
Do Safe Harbor rules apply to small businesses, and just what happens if I return the cash after the Safe Harbor deadline?
In this regard, the most recent guidance doesn't appear to distinguish between the sizes of the businesses that received funds, just the amount they borrowed. Should you borrowed under $2 million, not much will happen to you; you’ll just miss the chance to entitled to the ERC. If you’re simply worried about not qualifying for full forgiveness, you can still return the cash following the Safe Harbor period ends.
On another hand, if you borrowed more than $2 million and can’t demonstrate that you borrowed in good faith, you might be subject to audit and possible further law suit.
Will I must pay interest if I return the money?
If you return your PPP loan throughout the Safe Harbor window, you effectively never had the borrowed funds. Next, in case your loan hasn’t been forgiven, you might be thought to make a prepayment (check with your lender to be certain). There are no prepayment penalties on PPP loans.
Are PPP forgiveness rules going to change?
Difficult to know at this point. There are still some queries about how strictly the 75%/25% payroll/expense split will be enforced, how partial forgiveness works, whether the eight-week loan period is going to be extended, and so forth. will help you stay updated on any changes that come on the pipe.
