Like millions of American business owners, you may have spent days, weeks or even months jumping through hoops to secure your company’s Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program loans. You’ve been successful in applying and have received funding; so now what?
March 2020 (when the coronavirus pandemic began) seems so long ago, and while a lot has happened since then, we still know a lot less than we thought we would by now.
Businesses need to be able to utilize the many benefits offered by the PPP and EIDL loans, but also be aware that misuse or ignorance of the agreement terms can lead to loss of benefits or even worse civil and criminal fraud issues.
Most of what is currently in effect from the Small Business Administration (SBA) is being written and adapted as we go along. The initial rules remain but are continually being updated with interim rulings and new guidance from the United States Congress. There is a lot of speculation about what’s to come and “wait and see” happening.
Potential for Blanket Forgiveness
At print time, there was talk that Congress may pass a plan for across-the-board loan forgiveness for PPP loans under $150,000. Given that approximately 85% of all PPP loans are under this amount, if passed, the legislation will help lending banks, accountants, lawyers and business owners from having to deal with an avalanche of paperwork for loans that they ultimately don’t want to or have enough time to deal with.
When you mix government-backed loans with uncertainty and continually changing interpretations, things get interesting very quickly. It seems we really will have to wait and see how this plays out, all the while keeping up with changes.
A word of warning in case your company is a borrower of a PPP Loan under $150,000 that may be forgiven by an upcoming Congressional ruling, though—you still need to continue to abide by all of the rules and terms of the loan agreement as if the loan was not forgiven. The SBA still has the authority to audit your books and require you to adhere to the original terms you agreed to under the loan.
The Forgiveness Form
If Congress does not pass forgiveness, there are things to know to maximize potential forgiveness when submitting the SBA Forgiveness Form 3508 (or if eligible, the short form, the 3508 EZ). Employers that did not lay off or lose any employees to resignation and did not reduce their employees’ wages by 25% or more will likely be eligible for full forgiveness and are also able to use the 3508 EZ Form.
If your company did lay off employees or reduce employee salaries, this will be calculated on Schedule A of the SBA Form 3508. It’s a good idea to hire an expert to help with these calculations as they are very complex, dependent upon interpretation. There are safe harbor provisions that accounting and legal experts will analyze to see if your company qualifies.
The Forgiveness Timeline
If the SBA rejects your application, you have the right to file an appeal, which is more of an administrative review rather than a court case, and only the actual borrower can make the appeal. If you want representation, you will need to hire an attorney, as certified public accountants and enrolled agents are not allowed to represent borrowers. This is another great reason to follow the rules closely, keep excellent books and receipts, and hire an expert to assist you.
If your PPP forgiveness application and appeal are denied, or if your company doesn’t use the funds for forgivable expenses, you will be required to repay your loan. The PPP loan is not a personally guaranteed loan, but in the loan agreement the SBA notes that it will pursue criminal charges if the loan proceeds are used fraudulently.
The EIDL program was a separate $374-billion program that created low-interest, fixed-rate, non-forgivable loans to provide emergency assistance during the shutdowns caused by the coronavirus pandemic.
If you signed an EIDL loan, you will need to repay your loan amount at 3.75% interest over 30 years, with loan repayment due to begin 12 months from the date of the loan funding.
The SBA is administering these loans and has already sent out forms in the mail detailing repayment information. EIDL loan applications are still available online (covid19relief.sba.gov) for certain qualified businesses. If you have applied for an EIDL loan and are still waiting, you can check the status by sending an email to email@example.com.
What You Should Know
EIDL Loans may indeed affect future financing for the business. Loans under $200,000 did not require a personal guarantee, but all of the loans can appear on credit reports and affect the ability of the company to secure financing in the future. It is a breach of the loan agreement to pledge the same collateral to a different lender, and there is usually a federal lien with priority on the business assets that would deter other lenders from lending to the business until the federal priority is met and paid.
Terms of the loans also state that lenders have 60 days to review loan forgiveness applications, mostly to check calculations and ensure appropriate documentation was provided. They then must submit the application to the SBA, which has 90 days to complete its review. The SBA has stated that all loans over $2 million will be reviewed for compliance with program requirements.
Borrowers cannot change their business ownership or entity, such as adding or removing partners or merging with or acquiring other companies, without permission from the SBA and without risking default on the loan agreement. Increases in owner compensation or expenses—including bonuses—will be scrutinized so beware of making changes.
Both PPP & EIDL loans funds deposits should be entered on your company books as separate loans. Over the 8- or 24-week period, (or longer for EIDL loans) record all relevant, approved expenses using the date, vendor or payee, amount, category (such as payroll, rent, interest, etc.), as well as the purpose of the transaction. In addition to paper copies, retain the receipts, particularly SBA-loan-related expenses, in a cloud-based backup. EIDL loan receipt expenses should be kept for 3 years after the disbursement of loan funds.
For the PPP loan, at the end of the 8- or 24-week period, add up the category expenses and create a report that is to be attached to your loan forgiveness application. Make sure you don’t “double dip” and use the same expenses for both loans.
Once the forgiveness has been approved, you can adjust the loan account to a “Non-Taxable Gains or Other Income” account in your chart of accounts. Any amount that is not forgiven will remain in the loan account until repaid. Loan agreement terms dictate that the SBA has the right to audit borrower books at any time, so make sure to keep current with monthly reconciliations and reports.
It is a good idea for businesses is to use a payroll company to run payroll. This is more affordable than ever and helps avoid missed filing and deposit dates. The best companies will help with keeping up to date and compliant with PPP and EIDL requirements. This is valuable for existing SBA loan reporting, but also if there are new PPP or other future disaster-related loan or grant programs, as this important information will be instantly available. For companies that have SBA disaster loans from pre-COVID-19, call the SBA to see if they are eligible for forgiveness or if there is other favorable negotiation of terms for these loans.
To date, the U.S. Department of Justice has filed 39 PPP fraud cases, charging about 56 defendants. One of the cases involved purchasing a Lamborghini. Other cases used the loan funds to purchase vehicles, pay for their kids’ college tuition, buy boats and other toys or pay off mortgages. These fraud cases reinforce what not to do with your SBA loan funds. They should also put all borrowers on alert that the federal government will not play when it comes to fraudulent abuse of these loans.
Reach out to your lender or call the SBA if you suspect that your business did not get the correct amount for your PPP loan, which is 2.5 times the average payroll costs per month. They will help you figure out how to correct this issue. It is far better to handle it immediately so that it doesn’t appear to be deliberate or fraudulent.
Many cases exist where borrowers received more than they should have—an error some construction companies made was including subcontractor payments in their payroll calculations. Only W-2 employees’ wages should have been used in calculating payroll costs.
Dos & Don’ts of SBA Loan Proceeds
Do use your proceeds for the following:
- To pay off what your company owes the IRS
- To pay off revolving credit card debt for business expenses incurred prior to the disaster
- To pay off extraordinary expenses that have created “needs outside of normal operations” and directly due to the disaster. This may include: hardware for increased remote work, extra cleaning services and supplies, storage to make additional space in the building for social distancing, accounting, legal and consulting fees and advertising.
Do not use your proceeds for the following:
- Payment of dividends, bonuses or payments to owners, partners, directors or stockholders (unless directly related to the performance of services for the benefit of the applicant)
- Repayment of stockholder or principal loans (except when the funds were applied on an emergency basis due to the disaster and non-repayment would cause undue hardship to the stockholder or principal.
- Purchase of any new assets, such as land, buildings and equipment.
- Relocation is not allowed using EIDL funds.
- Refinancing long-term debt (debt that has a repayment period over one year), such as paying off other SBA loans, including regular installment payments.
Other Financing Options
The Main Street Lending Program (MSLP) hasn’t gotten much press, but Congress authorized the U.S. Treasury and Federal Reserve to release and administer through the Boston Federal Reserve a program to help small to midsize businesses.
The Federal Reserve is releasing $2.3 trillion in addition to $454 billion from the Treasury to support these programs. These resources tend to be a better fit for companies that are not really in financial trouble and were doing well before COVID-19 and need help with inexpensive liquidity.
Did You Know?
The coronavirus pandemic has affected almost every business in
the U.S. in some way, and government aid has proven to
be a lifeline for some businesses. Here’s a few interesting statistics:
- 5,212,128—Number of loans approved under the PPP program
- $525,012,201,124—Amount of approved dollars under the PPP program
- $100,729—Average PPP program loan size
- 3,573,856—Number of approved EIDL loans
- $188,022,021,024—Amount of approved dollars under the EIDL
- loan program