With the time period for processing a Paycheck Protection Program (PPP) loan with the SBA ending on June 30, borrowers are now focused on the process of applying for loan forgiveness. On June 25, we were joined by SBA Deputy District Director Peter Kontakos and Assistant District Deputy Director for Lender Relations Ili Spahiu of the SBA, along with Melinda Ailes, Senior Business Advisor at the Massachusetts Small Business Development Center, for a webinar that provided helpful insights into navigating the forgiveness process. Below are some key takeaways:
- Covered Period Extension. The PPP Flexibility Act, enacted June 5, 2020, extended the forgiveness measurement period (i.e., the covered period) for all borrowers, regardless of when funds were disbursed. Borrowers that received funds prior to June 5, 2020 should consider whether they will be able to meet the forgiveness criteria under the eight-week covered period or if they would benefit from utilizing the new 24-week week covered period.
- New Loan Term. New loans approved on or after June 5, 2020 will automatically have a five-year term. Previously approved loans will retain a two-year term for loans; however, if a borrower thinks it will need additional time to repay any amount not subject to forgiveness, it should reach out to its lender to request an extension of the term.
- FTE Requirements. To receive full forgiveness, borrowers must maintain their full-time equivalent (FTE) headcounts during the covered period as compared to the relevant reference period, although there is some flexibility as to how part-time employees are counted. The SBA has clarified that part-time employees can either be prorated based on hours paid or each part-time employee can be counted as a 0.5 FTE, regardless of hours paid.
- Non-Payroll Costs. Payments of obligations and services related to non-payroll costs must have been in place prior to February 15, 2020 in order to be eligible for forgiveness. While past payment obligations may be included, pre-payments will not be eligible for forgiveness to the extent such obligations will be incurred outside of the covered period.
- Timing. Borrowers should submit loan forgiveness applications as soon as they have met all qualifying criteria for full forgiveness as there is some lead time following the lender’s review of an application for forgiveness and the lender’s receipt of the forgiveness amount from the SBA, which could be up to 150 days. If a borrower will not qualify for full forgiveness, it can continue to defer any payments until the forgiveness process is complete provided that the borrower applies within 10 months following the end of the covered period.
- Going Concern. A borrower may apply for forgiveness only if such borrower’s business is still a going concern. The business does not have to be “open” (if, for example, the borrower’s business is closed due to a stay-at-home order or other related guidance), but it does have to be a going concern in order to apply and be eligible for forgiveness.
- Subsequent Change of Control. In the event a borrower will undergo a change of control due to a merger, sale, or other acquisition, the SBA will likely not provide consent to such a change of ownership, subject to any change in regulatory authority. It is likely that borrowers in this circumstance will either need to repay their PPP loan, hold a closing until their loan has been forgiven, or negotiate a special indemnity and/or escrow.
- Tracking. Borrowers should track all spending on the qualified expenses and report all such payments on their forgiveness application, even if it exceeds the amount of the PPP loan. While forgiveness is limited to the amount of the loan, these additional payments could offset any reduction in forgiveness resulting from a reduction in headcount or reduction in wages.
We anticipate that the SBA will issue additional guidance to borrowers on loan forgiveness. We will continue to provide updates and can help businesses navigate the parameters of this program.