One of the most attractive elements of the Small Business Administration’s Paycheck Protection Program (PPP) is the potential forgiveness of funds advanced that small business owners use for payroll and other eligible expenses.

Obtaining that forgiveness, however, may not be a straightforward process — and companies may want to strategize on how to maximize the use of the funds they receive.

There are also questions on whether or not you should take the loan or just pay back what you have already received. Can you certify that current economic uncertainty makes the loan request necessary to support your ongoing operations? What should you consider?

Business owners have to evaluate a variety of complex factors associated with the PPP — and plan beyond the short-term disruption we’re experiencing to ensure they have the resources to operate during the medium-term uncertainty of whatever becomes “normal” business conditions.

You need to review different scenarios to understand how get the most benefit from the PPP funds you have received. And given the complexity of decisions to be made, you may want to enlist outside help to identify the best choice for your business.

What if your employees don’t want to come back? Some employees are better off on unemployment, but that can hurt you as a company. Guidance was recently issued indicating that would not count against a company if they document the situation in writing.

Understanding PPP

The PPP, part of the $2 trillion CARES (Coronavirus Aid, Relief and Economic Security) Act, authorizes companies with fewer than 500 employees to borrow up to $10 million to fund payroll, rent, utilities and mortgage interest.

Business owners can apply to have their loans forgiven if they use the proceeds for maintaining payroll — salaries, health insurance and retirement contributions- for the eight-week period following the loan’s origination date. There is also an opportunity for certain rent, utility and interest payments to count toward forgiveness.

It’s important for business owners to understand the program’s requirements. For instance, this payroll figure is based on staffing levels before some companies were forced by market conditions to lay off or furlough workers, or to reduce salaries.

Any portion of the loan that is not forgiven must be repaid over two years at a 1 percent interest rate, with payments beginning six months after funding. This forgiveness will be prorated if payrolls aren’t maintained at mid-February staffing levels.

Although the prospect of having a loan forgiven is attractive, small business owners may face a variety of challenges in reaching the required spending levels and meeting the PPP’s evolving documentation requirements.

Loan amounts are based on either 2.5 times average monthly payroll costs for 2019 or the past 12 months, and the proceeds must be spent within eight weeks — a daunting prospect for some borrowers.

In addition, determining whether a loan, or a portion of a loan, should be forgiven is likely to be a confusing process — for borrowers and lenders alike — thanks to a need to provide information about ongoing expenses and how the PPP proceeds were spent.

Documentation Requirements

Determining eligibility for PPP loan forgiveness will require extensive documentation, including:

  • IRS and state payroll tax reports
  • Payroll reports for each worker and pay period for the eight weeks after loan origination
  • Staffing data showing any reductions in any year-over-year headcount reductions
  • Any wage reduction data
  • Health insurance premium expenses
  • Retirement plan funding
  • Lease agreements for real estate and personal tangible property
  • Loan statements indicating interest payments
  • Utility payments
  • Calculations of loan forgiveness based on the factors listed above

(For more details about the required documentation, download our PPP Forgiveness Checklist.)

This information will need to be tracked as expenses occur and assembled in a variety of formats including state reports and spreadsheet data, as well as copies of statements, agreements and canceled checks. (While you’re still working to maintain your business operations.)

Reviewing the documentation will also be a challenge for lenders, who themselves are advocating for guidance and standards in determining whether or not to forgive or prorate PPP loans.

Loan Advantages

Given the PPP loans’ extensive requirements, business owners need to go into the process with a clear understanding of their options.

For instance, having to pay back some of all of a PPP loan may provide a cost-effective choice for a company facing challenges in maintaining operations or obtaining capital.

The low interest rate may be attractive, and taking two years to pay back a PPP loan may look enticing, but can your business support the payments you will be required to make? What is the best strategy?

Contact us to schedule a consultation about your options, documentation requirements, or other aspects of the Paycheck Protection Program.