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PPP Loans: Navigating Loan Forgiveness and Repayment

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The potential for full loan forgiveness is one of the most attractive features of the Paycheck Protection Program (PPP), but it’s also been one of the trickiest. Congress added more money to the program this month to aid small business owners who continue to struggle as a result of the coronavirus pandemic.

First and second-time borrowers can get those loans forgiven if they spend at least 60% of funds on payroll costs over a maximum 24-week period. Keep reading to take steps to avoid falling into PPP loan debt.

How PPP loan forgiveness works

To be eligible for full forgiveness, as we mentioned earlier, at least 60% of the loan must be spent on payroll with the remaining 40% going toward overhead costs. You may be eligible for partial forgiveness if you don’t meet all of these criteria.

Eligible expenses include:

  • Mortgage interest or rent payments
  • Utilities
  • Payroll costs
  • Operational expenses as a result of the pandemic (software, cloud computing, human resources and accounting)
  • Property damage as a result of civil unrest in 2020 (expenses not covered by insurance)
  • Supplier costs as a result of the pandemic
  • Worker protection, such as personal protective equipment (PPE)

Borrowers have eight or 24 weeks to spend PPP funds on approved expenses starting as soon as they receive the first loan disbursement from their lenders. The first disbursement should be made within 10 days of approval. The repayment clock starts as soon as funds are disbursed or business owners may choose the first day of their first pay period after getting their loan.

When the eight- or 24-week period ends, borrowers have up to 10 months to submit their loan forgiveness application to their lender.

The following factors could reduce the amount forgiven:

  • Any reduction in employees during the eight- or 24-week period
  • Reduction in pay for any employee beyond 25% of compensation in the prior year
  • Compensation exceeding $100,000 in wages for individual employees

How forgiveness works if you laid off employees

Business owners who laid off employees before receiving a PPP loan would be eligible for forgiveness if they rehire those workers by the end of the covered period. The final covered period to rehire workers and spend PPP funds is set to end May 31, 2021.

If you can’t meet forgiveness requirements

Lenders have 60 days to review a forgiveness application and submit a decision to the SBA. The SBA then has 90 days to review the application to make its own decision and then remit the forgiven amount to the lender.

If you’ve already determined you won’t be able to meet the forgiveness criteria you may request a loan modification. Federal regulators have encouraged banks to modify loans for borrowers facing economic difficulties due to COVID-19. Banks can reduce interest rates, delay regularly scheduled payments, accept supplementary collateral and create additional loan arrangements. Consider asking your bank how it may be able to modify your PPP loan. Financial institutions must make sure that PPP loans with any modifications are still used for the intended purpose to support payroll.

How to maximize your PPP loan forgiveness

PPP loan forgiveness depends on a borrower’s payroll expenses, plus rent, utilities, mortgage interest and other eligible expenses. Borrowers must show that they’ve maintained wages and employment levels for full-time employees. Go ahead and begin organizing documents and records you may need.

Track eligible expenses incurred and paid in the weeks following funding.

To be eligible for full loan forgiveness, you must spend 60% of your PPP loan on payroll. Eligible payroll expenses include:

  • Cash compensation of $100,000 or less per employee, including furloughed workers
  • Costs for employee vacation and parental, family, medical and sick leave
  • Allowance for employee separation or dismissal
  • Employee benefits
  • Group health coverage and insurance premiums
  • Retirement contributions
  • Payment of state or local taxes levied on employee compensation

You can spend the remaining 40% of your PPP loan on the items we listed earlier: mortgage interest or rent payments (for mortgages or leases in effect before Feb. 15, 2020); utilities such as electricity, gas, internet access, transportation, phone or water payments, as long as services were established before Feb. 15, 2020; operational expenses and supplier costs as a result of the pandemic; and personal protective equipment for you and your employees.

TIP: Open a separate PPP account
Though not required, opening a separate bank account to manage your PPP funds could help you more easily track and monitor your use of the loan.

If you received an Economic Injury Disaster Loan grant — another SBA emergency business funding option — you no longer have to subtract it from your forgiven PPP loan amount.

Rehire employees that you recently laid off.

If you had to lay off employees in response to the coronavirus pandemic, you may still qualify for loan forgiveness if you rehire those employees by May 31, 2021. You must offer the same wages and number of hours when reinstating those workers.

Your PPP loan forgiveness amount would not be impacted if former employees refuse your offer of reemployment and you cannot find qualified employees to fill those positions or if you cannot resume previous levels of business operations. To qualify for these exceptions, you must have made a good-faith, written offer of rehire. You must also document the former employee’s rejection. Keep in mind that anyone who rejects an offer of reemployment loses their eligibility for unemployment compensation.

What to expect if the SBA does not forgive your PPP loan

Any PPP loan amount not forgiven at the end of the 24-week covered period would be subject to five-year repayment terms with 1% interest. The good news: All PPP loans have 10 months of deferred payments. In other words, you won’t have to begin repaying the loan right away.

After the 10-month period, your PPP loan would fully amortize over the remaining 50 months. You could expect the payment process to be similar to how your bank normally accepts payments for standard business loans, said James Kendrick, a first vice president at Independent Community Bankers of America.

Your bank may accept payments at a branch or through its app, automatic withdrawals from your account or a third-party vendor. In case you don’t receive full forgiveness, make sure you understand how your bank expects you to repay the loan.


What if I spend PPP funds on costs outside of the SBA’s approved expenses?

You will not receive full loan forgiveness if you do not spend at least 60% of your PPP loan on payroll and the remaining 40% on rent, mortgage interest, utilities and other eligible expenses. You’ll need to repay any amount not forgiven, which would include any funds spent on nonapproved expenses. If you stray from the approved expenses, the SBA may look into whether your business truly needed the PPP loan.

If my loan is forgiven, do I still owe interest?

No, you would not owe interest on any PPP loan funds that are forgiven.

What if I attempt to rehire employees and they reject my offer?

Your loan forgiveness would not be affected if former employees refuse your offer of reemployment. Your forgiveness amount would not be reduced as long as you made your offer in writing and documented their refusal.


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