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New PPP Loans: Questions and Answers

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There are 5,593 pages in the new COVID-19 economic relief bill. For a busy financial advisor, sifting through it may seem like an incredibly daunting task.

Having helped 1,300-plus small businesses secure more than $150 million in Paycheck Protection Program loans under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, I can share some answers to common questions our borrowers have asked now that the bill has been signed into law.

The latest stimulus package includes key updates related to the Small Business Administration’s PPP and signature 7(a) loan program that impact existing and new borrowers. The details can be complicated for any small-business owner, but you can help clients by anticipating their questions.

Can borrowers get a second PPP loan?

Yes, if they meet certain criteria. The SBA reopened the program through March 31. PPP borrowers are eligible for an additional (“Second Draw”) PPP loan if they employ 300 people or fewer; have used or will use the full amount of their first PPP loan; and demonstrate a minimum 25% reduction in gross receipts during any quarter in 2020 compared with the same quarter in 2019.

Those who are eligible may apply for up to 2.5 times the borrower’s average monthly payroll during 2019 or 2020, but no more than $2 million. The maximum amount is significantly less than the first round of the PPP, which allowed borrowers up to $10 million.

Hard-hit businesses — those in the Accommodations and Food Services industries — may qualify for second draw loans of up to 3.5 times their average monthly payroll costs, which equates to 140% of their original PPP loan.

What are the rules for PPP loan forgiveness for second-draw loans?

Forgiveness rules and processes are generally the same for second-draw loans as they are for original PPP loans, although the application process will be easier for many.

Borrowers are eligible to have their loan forgiven in its entirety if they use the funds toward eligible costs during the applicable covered period (any time frame between eight and 24 weeks from loan disbursement).

To qualify for full forgiveness, at least 60% of loan funds must have been spent on payroll costs; the rest may be used toward business mortgage interest payments, rent, utilities, or other expenses newly eligible under the new stimulus law, such as certain operations expenses, supplier costs, and worker protection expenditures.

Detailed documentation of PPP-related spending is critical for borrowers to earn maximum loan forgiveness. Acceptable documentation includes paid checks, payroll documentation, receipts, and billing statements.

What is the process to apply for loan forgiveness?

The SBA has until Jan. 20 to develop forms and instructions for a one-page forgiveness application for loans of $150,000 or less. Borrowers who qualify for simplified forgiveness will be required to sign and submit the form and include details such as the number of employees retained and the amount spent on payroll.

Borrowers must attest to the accuracy of the certification and that they complied with PPP requirements. Supporting documentation will not be required with the simplified forgiveness application, but must be retained for four years for possible future review by SBA.

The law did not change the forgiveness process for loans over $150,000.

What are the key updates for SBA 7(a) loans? 

Under the CARES Act, the SBA covered six months of payments on all loans existing as of March 27, 2020, and any new loans issued prior to Sept. 27, 2020.

Under the new law, these borrowers will receive an additional three months of payments from SBA, beginning in February. Borrowers who take out new loans before Oct. 1 will receive the first six months of principal and interest payments from SBA. All payments provided for in the new stimulus law will be capped at $9,000 a month.

The law also provides for an additional five months of payments for existing borrowers (as of Dec. 27, 2020) in industries hit hardest by the pandemic.

Temporary changes to the 7(a) loan program also include a guaranty increase to 90%, up from 75%, and fee waivers through Sept. 30.

Small businesses are key to our nation’s economy and its recovery from the pandemic. If you have clients who own businesses that are suffering, they will appreciate the guidance you can offer by explaining the financial programs that can help them achieve their goals.

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Mark Schmidt is CEO of Fund-Ex Solutions Group, an SBA Preferred Lender and one of only 14 nonbank lending companies licensed by the SBA to offer 7(a) loans and the Paycheck Protection Program.