Important PPP Repayment Updates for Small Business Owners
On June 16, 2020, the SBA announced new rules for business loans under the Paycheck Protection Program (“PPP”) Flexibility Act. Business owners struggling with the complicated PPP forgiveness process may be relieved that these changes make the program more flexible and alleviate some of the more burdensome requirements for borrowers:
The SBA’s Revised Rule changes the “covered period” for some PPP loan requirements. Some business owners may have missed out on the original “covered period” that ended June 30, 2020, referring to the window of time during which businesses could spend their PPP loan funds. This period now extends to December 31, 2020 for loan use, loan eligibility, and related requirements, so borrowers that had yet to fully use their loans before the original expiration date will now have that opportunity through the end of the year.
The SBA’s Revised Rule extends the minimum loan maturity to 5 years. Previously, borrowers needed to fully repay their loans by the end of a 2-year maturity period, when the loan terminated. Thanks to the current revision, however, business owners receiving loans on or after June 5, 2020 will now have a loan maturity of 5 years, allowing them to pay smaller installments over a longer period of time. Borrowers who received loans prior to June 5, 2020 will also have the option to extend their repayment period from 2 years to the new minimum of 5 years, but they’ll need approval from their lenders.
The SBA’s Revised Rule extends the deferral period for PPP loans. Business owners now have more time before they have to start repaying any unforgiven portions of their PPP loans. Although interest will still be accruing, business owners will not be required to start repaying PPP funds until the end of both a 24-week “loan forgiveness covered period” from when the loan is disbursed (though it will not extend later than December 31, 2020), giving borrowers much more time to qualify expenses for forgiveness than under the previous 8-week period, and a 10-month deferment period starting at the end of the covered period. The rule does still allow borrowers to opt into the previous shorter qualifying period of only 8 weeks if they so choose.
The SBA’s Revised Rule provides more leniency for loan forgiveness by reducing the amount of the loan that must go toward payroll expenses. One of business owners’ biggest headaches when determining their eligibility for PPP loan forgiveness has been the mandatory percentage of the loan they are required to use for “payroll expenses” (CARES Act, §1102(a)(36)(A)(viii)). Now, business owners will be relieved to find a more lenient interpretation of this threshold. Rather than requiring borrowers to spend 60% of their total loan funds on payroll expenses to qualify for loan forgiveness at all, this updated rule removes that harsh penalty and allows for partial forgiveness. Business owners who fail to meet this threshold for total loan forgiveness will still be eligible for partial forgiveness based on the requirement that 60% of the amount forgiven must be spent toward payroll.
The SBA’s Revised Rule creates a loan forgiveness safe harbor for employers who cannot rehire previous full-time employees. Many business owners who received PPP funds but were not able to maintain previous employee and business capacity levels faced the penalty of a reduction in their forgivable loan amount. Fortunately, this revised rule creates a safe harbor for borrowers who show in good faith that they are unable to rehire previously employed individuals or new similarly qualified employees, meaning that their loan forgiveness amount will not be limited based on that reduction in capacity.
Although this revised rule will make many business owners’ lives easier, it could create complications for business owners who already submitted their repayment forms and now may qualify for more generous terms. If you have concerns about how these changes affect your business’s repayment obligations, our legal team is here to help. Schedule a consultation at our website.