What You Need to Know: Paycheck Protection Program Loan Terms & Forgiveness

As we’ve shared, the Small Business Administration’s (SBA) Paycheck Protection Program provides 100% federally guaranteed loans to small businesses where qualified businesses with fewer than 500 employees can receive 2.5 times one month’s total payroll.

Recently updated FAQs to the Payroll Protection Program clarifies that restaurant companies that are set up as separate legal entities wholly owned by a Parent company are each eligible to apply for separate PPP loans up to a maximum of $10 million per entity (assuming other eligibility requirements are met such as a 72 NAICS Code and less than 500 employees per location). This is particularly good news for consolidated corporate groups that have multiple subsidiaries as well as other organizational structures that involve multiple separate legal entities.

NOTE: As of April 16, the program ran out of its initial funding amount. However, many lenders are still accepting applications in anticipation of more funds becoming available. If you have not yet applied for the Paycheck Protection Program, contact your banking institution for more information on the loan process.  

If you have been approved for a loan, you’ll want to start preparing the necessary processes now for loan payback or forgiveness.

Loan Terms and Forgiveness

The payroll protection loan has a repayment plan of two years and a fixed interest rate of 1%. Loan payments are deferred for six months, although interest will still accrue during this time. However, all or a portion of your loan may be forgivable depending on what you use it for.

If you retain employees and maintain salary levels, the SBA will forgive the portion of the loan that covers your first eight weeks of payroll, mortgage interest, rent, and utility payments. The SBA will not forgive a portion of the loan that you use for other expenses.

Important forgiveness requirements to note:

1. Additional guidance from the SBA stated that no more than 25% of the forgivable amount of a PPP loan can be attributable to non-payroll costs.

  • Example: X Co. borrowed $100,000 in PPP proceeds on April 10, 2020. Over the next 8 weeks, X Co. spent $50,000 on payroll costs and $50,000 on rent and utilities. X Co.’s loan forgiveness is limited to $75,667; $50,000 in payroll costs and $25,000 in rent and utility expenses.

2. The 8-week forgiveness period is not flexible and begins on the date the borrower receives the disbursement of the loan (which the bank is required to make within 10 days of loan approval). For many businesses, this might mean that in order to achieve full loan forgiveness they will need to pay employees not to work. According to the Treasury, your loan forgiveness will decrease if you do not maintain your staff an payroll.

3. Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.

  • Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
  • Re-Hiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

Start Preparing Now to Request Loan Forgiveness

More details are still emerging on the loan forgiveness process and your lender will be your primary resource for this information. The most important thing you can do to ensure you are able to achieve maximum loan forgiveness is to keep detailed records of the disbursement of loan amounts.

To simplify your records, consider setting up a separate bank account exclusively for your loan funds and only withdraw from that account to cover eligible expenses. You can also create a separate expense account to track all eligible costs.

You can request loan forgiveness by submitting a request to your lender after the eight-week loan period. Your loan forgiveness request should include documents showing:

  • The number of full-time equivalent employees and their pay rates.
  • Eligible mortgage, lease, and utility payments.

Your lender has 60 days to make a decision on your loan forgiveness.