The concept of financial assistance for small businesses is nothing new, but during the COVID-19 crisis, the need for aid has been much greater than usual. With the economy stuck in a recession and pandemic-related closures hurting local establishments left and right, it was clear to lawmakers that small businesses would need a substantial amount of help to make it through 2020 without running the risk of having to close permanently.
That help came in the form of the Paycheck Protection Program, or PPP. Under the PPP, companies with up to 500 employees on staff could qualify for a loan equal to two-and-a-half times their monthly payroll costs. The best part? PPP loans are completely forgivable provided that at least 60% of their proceeds are used for payroll expenses.
If you took out a PPP loan, you may be eager to have that debt forgiven. But here's why you may have to settle for partial loan forgiveness instead.
You can only get so much free aid
PPP loans weren't the only type of relief available to small businesses during the pandemic. Economic Injury Disaster Loans were also an option, and while they're not forgivable like PPP loans, they did offer businesses the option to secure a grant equal to $1,000 per employee for a total of 10 employees, or $10,000. EIDL grants were given out as advances on their associated loans, and they don't need to be repaid. But if you received an EIDL grant as well as a PPP loan, you should know that your PPP loan forgiveness will be reduced by the amount of your grant. And that's something you may need to plan for.
Of course, even if you are required to repay a portion of your PPP loan, you'll be subject to extremely favorable borrowing terms. PPP loans have a 1% interest rate attached to them, and loans issued before June 5 have a two-year repayment period. Those issued after June 5 have a five-year repayment period.
When should I apply to have my PPP loan forgiven?
The Small Business Administration (SBA) is already allowing PPP loan recipients to apply for forgiveness. But you may want to hold off. The rules surrounding forgiveness have evolved since the program began (case in point: the percentage of loan proceeds needing to be spent on payroll has already shrunk from 75% to 60% for forgiveness purposes since the program was rolled out), so if you sit tight, you may get better clarity on what expenses are considered forgivable.
There have also been rumors circulating that the SBA will automatically forgive PPP loans that fall below a certain monetary threshold. It's unclear what that threshold will entail, but if your loan was somewhere in the under $20,000 range, for example, you may not have to fill out any paperwork at all to have it forgiven. Therefore, you may want to sit tight and wait for more information and guidance before going through the steps to have your loan wiped out.