Are PPP Loans Truly Forgivable?

Posted by: Eva Prada      July 2, 2021


The PPP (Paycheck Protection Program) loans are given mostly to smaller and medium-sized businesses, in order to help keep them afloat during the pandemic and ensure that they can survive until things improve. One of the biggest things that might stop an eligible business from applying for one of these loans is the idea of taking on more debt during an uncertain time. That's a valid and significant fear, but it's also important to note that the PPP loan forgiveness requirements aren't necessarily as complicated as they seem.

Most PPP loans really are forgivable, and the ones that aren't generally have at least a big portion that can be forgiven. It takes honesty, accurate information, and the right type of paperwork to make sure that a PPP loan is forgiven properly. Keeping good records is an important part of handling this type of loan the right way. Here's what every business should know about PPP loan forgiveness, so they can decide if they want to apply for this money to help their business make it through the pandemic.

The Small Business Administration Guidelines

Loans and their forgiveness are handled by the Small Business Administration (SBA). According to their criteria, it's important for any business that gets a PPP loan to keep similar compensation and approximately the same number of employees. These companies also need to use the money for approved costs. This includes rent, payroll, and utilities. Additionally, at least 60% of the total loan amount has to be spent on payroll, as that should be the biggest reason for getting the loan.

These loans are designed to keep businesses around during the pandemic and beyond, but they're also designed to keep people working at those businesses and off of unemployment. If most of the PPP loan money isn't being used for payroll, there's a real possibility that the workers will need unemployment compensation. That defeats a big purpose of the loan, which is why good recordkeeping matters when it comes to businesses that are seeking PPP loan forgiveness.

The Forgiveness Process Is Not Complicated

The lender who provided your PPP loan funding is the one who will also process your forgiveness information. Loans that are under $150K have only a single form that has to be filled out. This is called the 3508S application. You won't have to prove how you calculated the information or show any documentation with the form. Just make sure to hang onto the documentation, in case of an audit at a later time. That's unlikely, but it's not impossible and should be planned for on a "just in case" basis.

Funds that are utilized properly are definitely eligible for forgiveness, and companies that are handling those funds correctly shouldn't be worried about having to pay back their loans. The SBA offers plenty of information on loan forgiveness for those who have loans larger than $150K, as well. These borrowers have a longer and more detailed form to fill out, but forgiveness requirements are still basically the same. When the money is used correctly, there's no reason to worry about forgiveness issues.

What About Sole Proprietors?

The original PPP loan program didn't make it easy on sole proprietors. Many of them didn't qualify as a "business" under the guidelines, because they didn't have a business checking account or pay themselves as employees. As such, they didn't have payroll to list or receive money for. But with the newer guidelines it's possible for sole proprietors to get PPP loans, as well. They only need to fill out the form for forgiveness, just like other businesses, and can use the loan as owner compensation.

In other words, they can really spend it on whatever they want, because they would typically just receive money from being in business and spend it however they chose to. They can do the same thing with the PPP loan, but it's still a good idea to keep records of how it was spent. If it was used in a way that wasn't owner compensation, that could be problematic, but it's very unlikely that any sole proprietor would use the money in a way that wasn't, essentially, paying themselves, so they could pay their obligations.

Don't Let Debt Fears Stop You

The prevailing reason that business owners avoid applying for a PPP loan is the worry that they're going to have to pay the money back. Even if they did have to, the rate is 1%. It's unlikely they can borrow money anywhere else at that price. However, it's also important to be aware that deliberately getting a PPP loan with deceptive information could open a business up to fraud prosecution. So it's vital to make sure the money that's requested is being done so within SBA guidelines and requirements.

But as for fearing debt, or a lack of forgiveness, those aren't generally realistic worries for small businesses that apply for PPP loans. Lenders are usually pretty careful with the money they give out, and the SBA has simplified the process in order to make it easier for companies to get their debt forgiven. Because of that, businesses that have questions can find plenty of good information about what they can use the PPP loan for and how they can get it forgiven, so they don't need to worry about repayment.

The PPP Loan Can Offer Valuable Help

For companies that need a little extra boost due to the pandemic, the PPP loan is an option that can make a big difference in their bottom line and ability to stay in business. Additionally, companies that saw a 25% reduction or more in their business's income between 2019 and 2020 may be eligible for a second draw PPP loan -- which means they'll be given more money they can use to pay their employees and covered expenses, due to the ongoing pandemic and economic hardships coming from it.

Companies shouldn't be fearful of taking a PPP loan. In the vast majority of cases, all or most of the loan will be forgiven. Any balance that's not forgiven is on good terms at a very low interest rate. The forgiveness opportunities and other options provide businesses with a way to get more help and support during a difficult time. Not only does that help the business owners, but it also helps the employees and customers of those businesses, and the economy as a whole, in order to keep the country operating while a return to normalcy is sought. If PPP loan forgiveness worries have been holding you back, now is the time to put those aside and apply for a PPP loan.

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