Most Paycheck Protection Program (“PPP”) borrowers are working toward full forgiveness of their PPP loans and are anxious to get this process started. A borrower may submit a loan forgiveness application any time on or before the maturity of the loan—including before the end of the covered period—if the borrower has used all of the loan proceeds. But that does not mean a borrower should submit a loan forgiveness application as soon as possible. There are many considerations you should take into account when deciding when to submit forgiveness applications to the lender. Patience and adequate preparation may be more than just virtues in the PPP loan forgiveness context; they may lead to financial benefits for borrowers as well. This article discusses the timing considerations and other items that may impact a borrower’s decision to submit the loan forgiveness application to its lender.
Forms and Readiness of the Small Business Administration (“SBA”) and the Lender
Forms: As of August 6, 2020, there are two types of loan forgiveness application forms: Form 3508 and Form 3508EZ. Neither of these forms has been updated to reflect the five-week extension of the program’s deadline to August 8, 2020. In addition, there are legislative proposals to reduce this paperwork for loans under $150,000 and for loans between $150,000 and $2 million. As such, we expect changes to these loan forgiveness applications.
SBA Timing: The SBA has announced that it will not accept PPP forgiveness submissions from lenders until a new platform goes live on August 10, 2020, subject to extension if any new legislative amendments to the forgiveness process necessitate changes to the system. We expect further legislative changes.
Lender Timing: Even if a borrower is ready to apply for forgiveness, its lender may not be ready to receive and review loan forgiveness applications. The SBA allows lenders to have their own “lender equivalent form.” Most lenders are not ready to process forgiveness applications and are still in the process of developing tools such as “forgiveness portals.” Although the SBA and the U.S. Treasury Department have issued some guidance, we expect that more guidance may be needed for lenders to finalize their portals or documents.
Time Is on Your Side
Extended Coverage: The covered period of PPP loans was extended, so there is no need for a borrower to rush the loan forgiveness application process. The Paycheck Protection Program Flexibility Act of 2020 (“PPPFA”) was enacted on June 5, 2020, and it extended the covered period from 8 weeks to the earlier of December 31, 2020, or 24 weeks from the date of the loan. If a borrower received its PPP loan before June 5, 2020, the PPPFA allows the borrower to elect to use an 8 week covered period. The covered period extension was made with retroactive effect as if it were originally enacted in the CARES Act. If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the payments on the PPP loan are no longer deferred and the borrower must begin paying principal and interest. Taking advantage of the full 24 weeks may give a borrower more time to take steps that will help them qualify for full loan forgiveness. However, it should be noted that waiting may increase the amount of interest a borrower pays with respect to any part of the loan that will not ultimately be forgiven. In addition, there may be other reasons, not to wait—see below.
Guidance May Evolve: Because of the constantly evolving guidance with respect to loan forgiveness, borrowers should consider waiting before they file their loan forgiveness applications. For example, consider the plain language of the PPPFA that the SBA interpreted differently in a later Interim Final Rule. Section 3(b)(8) of the PPPFA expressly provides that unless 60% or more of the loan proceeds are used for payroll, no forgiveness will be allowed. However, the SBA announced later that it would not be interpreting the PPPFA in that manner. Instead, the SBA indicated that the proper interpretation of Section 3(b)(8) of the PPPFA is that it does not make loan forgiveness under the PPP an all-or-nothing proposition for the borrowers. Rather, the 60% number is to be applied on a proportional basis instead of a cliff, thus allowing borrowers to seek forgiveness even though less than 60% of the loan proceeds were used for payroll costs. Although the plain language of the acts related to the PPP may seem clear, the constantly evolving guidance from the SBA and Treasury may change interpretations. Because new interim final rules are coming out and further pandemic aid bills are still being introduced into Congress, hurrying up the process of filing for loan forgiveness may not be warranted if the forgiveness landscape continues to change.
More Guidance Is Expected: We are expecting more guidance in a number of areas. Those areas include questions about utilities, exceptions to the full-time-equivalent (FTE) rules, clarifications needed for self-employed borrowers, payments to related parties, and other items. If any of these issues are critical for a borrower’s loan forgiveness, the borrower may want to consider waiting for additional guidance. For example, on August 4, 2020, the SBA posted 10 pages of guidance—the Frequently Asked Questions (FAQs) on PPP Loan Forgiveness—and we expect more guidance.
Documents Are Critical: The forgiveness applications issued by the SBA require that they be accompanied by detailed documentation and that additional documents be retained by the borrower. If the lender identifies errors in the borrower’s calculations or a material lack of substantiation in the borrower’s supporting documents, the lender is to work with the borrower to remedy the issue. A borrower should take the time to make sure they have both the accompanying documentation and the documents to be retained available at the time of the submission. Don’t put off getting the “retained” documents together. The SBA has a right to request that retained information as part of its review. If the borrower does not promptly provide documents, this may cause delay and possibly denial of forgiveness. See “Key Consideration for PPP Documentation” and “A Guide to the SBA PPP Loan Forgiveness Review Process.”
Calculations: The borrower is responsible for accurately calculating the loan forgiveness amount, even though most lenders will have their own calculators. The American Institute of CPAs (AICPA) and Biz2Credit, Inc. have put together a PPP Forgiveness Tool, which some borrowers may find helpful to double check their bank’s calculator. We were not involved with the preparation of this tool. We do not make any warranties regarding the accuracy or propriety of the information that is provided by the tool. Each borrower should seek its own accounting and legal advice regarding its calculations.
Loans Over $2 Million: The SBA has indicated that it will review loans in excess of $2 million, and the SBA loan forgiveness applications have a box relating to PPP loans in excess of $2 million (including affiliates). However, at this time, we do not know the timing and extent of this SBA review. We do know that the SBA will be reviewing these loans to make sure the borrower’s self-certification for the loans was appropriate. In particular, it has highlighted that borrowers must have “an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.” In addition, the SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to SBA review for compliance with program requirements set forth in the PPP interim rules and in the borrower’s PPP loan application. Borrowers should take the time to prepare, gather, and organize these documents in contemplation of this review.
Does the Borrower Want to Be the First One through the System: The PPP process has been uneven and frustrating for many borrowers. The loan forgiveness process will be a new system for the lenders and for the SBA. Borrowers should consider whether they want to be the first ones through the system or whether they want to wait for the process to get established before submitting an application.
Loan Documents May Need to Be Amended: Some lenders’ PPP loan documents require a borrower to apply for forgiveness within a certain time period or have set maturity dates or interest payment dates. Some lenders specified explicit terms, such as how much of nonpayroll expenses are forgivable, covenants regarding eight-week covered periods, or a requirement to not take out additional PPP loans. The recent legislative changes and expected additional legislation will likely alter these previously established loan terms. It would be well worth reviewing those documents to determine if they contain such provisions, what the consequences might be for failing to meet the deadlines or covenants, or if the provisions may be extended or corrected with an amendment to the loan document. This may be very important if the borrower has cross default provisions in other loan documents or leases or important contracts, like major supplier/vendor contracts, as these other parties may take advantage of these “technical breaches.” In addition, the lender’s forgiveness applications may require the borrower to certify that the borrower has met all the terms of the loan documents, resulting in a potential false certification if the terms are not changed or updated. In the past, the SBA has been very strict and unforgiving of “technical false certifications.”
Changes to Business Structure: Many borrowers have had to revise their business structure in the face of the pandemic. Changes to a business’s legal structure, a decrease in employee count, or eliminating a division or subsidiary after a borrower takes out a PPP loan may affect the borrower’s ability to receive full or partial loan forgiveness. Depending on the timeline of these changes, it may be beneficial to apply for forgiveness before the changes take place, especially if the borrower is relying on FTE Reduction Safe Harbor 2, which is tied to the date of the forgiveness application. In addition, if a borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salary or wages in excess of 25%, the borrower must account for the excess salary reduction for the full covered period.
M&A Transactions: The PPP may have a variety of implications on pending and potential M&A transactions. If the PPP loan is in place, then the parties need to consider whether the transaction could trigger a default under the PPP loan. If the parties want to keep the PPP loan in place post-closing, then prior lender and SBA consent will likely be required. In addition, if the loan remains in place post-closing, there are a number of negotiating points that need to be covered regarding the borrower’s compliance with the PPP loan terms, the representations and warranties and indemnifications regarding the loan, and control of the forgiveness application process and submission. These considerations are in addition to the items set forth in the “Changes to Business Structure” section.
Because of the many variables that affect each borrower differently, a borrower should consider discussing the loan forgiveness process with legal counsel before submitting the application.