Business Loans

PPP Loans: Navigating Loan Forgiveness and Repayment

The potential for full loan forgiveness is one of the most attractive features of the Paycheck Protection Program (PPP), but it may also be one of the trickiest. The federal rescue program supplies up to $10 million to small business owners struggling as a result of the coronavirus pandemic. They can get those loans forgiven if they maintain their payrolls.

For owners who received PPP loans starting in early April, the clock had been ticking on the eight-week period to spend the funds and hire back workers they may have laid off.  Congress extended that clock in June to 24 weeks, thanks to the Paycheck Protection Program Flexibility Act. But even if you haven’t received your loan or have yet to apply, it’s not too early to take steps to avoid falling into PPP loan debt.

How PPP loan forgiveness works

To be eligible for forgiveness, PPP loans must be used to cover payroll expenses, rent payments, mortgage interest and utilities. At least 60% of the loan must be spent on payroll with the remaining 40% going toward overhead costs just mentioned. This is a change brought about the Paycheck Protection Program Flexibility Act which became law on June 5. You may be eligible for partial forgiveness if you do not meet the 60% threshold, as long as you spent 60% of the forgiven amount on payroll costs.

Borrowers now have 24 weeks to spend PPP funds on approved expenses starting as soon as they receive the first loan disbursement from their lenders. The first disbursement should be made within 10 days of approval. Borrowers could instead choose to stick with their original eight-week term. The clock starts as soon as funds are disbursed or business owners may choose the first day of their first pay period after getting their loan. The SBA released a loan forgiveness application that you would submit to your lender at the end of your eight- or 24-week period. The SBA also offers an EZ forgiveness application for borrowers who need to make fewer calculations and provide less documentation.

The following factors could reduce the amount forgiven:

  • Any reduction in employees during the eight- or 24-week period
  • Reduction in pay for any employee beyond 25% of compensation in the prior year
  • Compensation exceeding $100,000 in wages for individual employees

How forgiveness works if you laid off employees

Business owners who laid off employees before receiving a PPP loan would be eligible for forgiveness if they rehire those workers by the end of the covered period. The final covered period to rehire workers and spend PPP funds is set to end Dec. 31, 2020.

If you can’t meet forgiveness requirements

Lenders have 60 days to review a forgiveness application and submit a decision to the SBA. The SBA then has 90 days to review the application to make its own decision and then remit the forgiven amount to the lender.

If you’ve already determined you won’t be able to meet the forgiveness criteria you may request a loan modification. Federal regulators have encouraged banks to modify loans for borrowers facing economic difficulties due to COVID-19. Banks can reduce interest rates, delay regularly scheduled payments, accept supplementary collateral and create additional loan arrangements. Consider asking your bank how it may be able to modify your PPP loan. Financial institutions must make sure that PPP loans with any modifications are still used for the intended purpose to support payroll.

How to maximize your PPP loan forgiveness

PPP loan forgiveness depends on a borrower’s payroll expenses, plus rent, utilities and mortgage interest payments. Borrowers must show that they’ve maintained wages and employment levels for full-time employees. Go ahead and begin organizing documents and records you may need.

Track eligible expenses incurred and paid in the weeks following funding.

To be eligible for full loan forgiveness, you must spend 60% of your PPP loan on payroll. Eligible payroll expenses include:

  • Cash compensation of $100,000 or less per employee, including furloughed workers
  • Costs for employee vacation and parental, family, medical and sick leave
  • Allowance for employee separation or dismissal
  • Employee benefits
  • Group health coverage and insurance premiums
  • Retirement contributions
  • Payment of state or local taxes levied on employee compensation

You can spend the remaining 40% of your PPP loan on mortgage interest for mortgages that were in effect before Feb. 15, 2020, and rent payments for leasing agreements that were in place before Feb. 15, 2020. Eligible utilities payments include electricity, gas, internet access, transportation, phone or water payments, as long as services were established before Feb. 15, 2020.

TIP: Open a separate PPP account
Though not required, opening a separate bank account to manage your PPP funds could help you more easily track and monitor your use of the loan.

If you received an Economic Injury Disaster Loan grant — another SBA emergency business funding option — the amount of your grant would be subtracted from your forgiven PPP loan amount. Keep your EIDL grant in mind when calculating how much of your PPP loan may be forgiven.

Rehire employees that you recently laid off.

If you had to lay off employees in response to the coronavirus pandemic, you may still qualify for loan forgiveness if you rehire those employees by Dec. 31, 2020. You must offer the same wages and number of hours when reinstating those workers.

Your PPP loan forgiveness amount would not be impacted if former employees refuse your offer of reemployment and you cannot find qualified employees to fill those positions or if you cannot resume previous levels of business operations. To qualify for these exceptions, you must have made a good-faith, written offer of rehire. You must also document the former employee’s rejection. Keep in mind that anyone who rejects an offer of reemployment loses their eligibility for unemployment compensation.

What to expect if the SBA does not forgive your PPP loan

Any PPP loan amount not forgiven at the end of the 24-week covered period would be subject to five-year repayment terms with 1% interest. The good news: All PPP loans have 10 months of deferred payments. In other words, you won’t have to begin repaying the loan right away.

After the 10-month period, your PPP loan would fully amortize over the remaining 50 months. You could expect the payment process to be similar to how your bank normally accepts payments for standard business loans, said James Kendrick, a first vice president at Independent Community Bankers of America.

Your bank may accept payments at a branch or through its app, automatic withdrawals from your account or a third-party vendor. In case you don’t receive full forgiveness, make sure you understand how your bank expects you to repay the loan.


What if I spend PPP funds on costs outside of the SBA’s approved expenses?

You will not receive full loan forgiveness if you do not spend at least 60% of your PPP loan on payroll and the remaining 40% on rent, mortgage interest and utilities. You’ll need to repay any amount not forgiven, which would include any funds spent on nonapproved expenses. If you stray from the approved expenses, the SBA may look into whether your business truly needed the PPP loan.

If my loan is forgiven, do I still owe interest?

No, you would not owe interest on any PPP loan funds that are forgiven.

What if I attempt to rehire employees and they reject my offer?

Your loan forgiveness would not be affected if former employees refuse your offer of reemployment. Your forgiveness amount would not be reduced as long as you made your offer in writing and documented their refusal.


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