What if Your Paycheck Protection Program Loan Forgiveness is Denied?

Paycheck Protection Program (PPP) loans were put in place by Congress to address the economic downturn caused by the 2020/2021 coronavirus pandemic.

Forgiveness is a hot topic and PPP loans can be partially or fully forgiven if certain criteria is met. However, there are instances where forgiveness is denied. If that’s happened to you, here are reasons why you might have been turned down and what you can do next.

Apply for the latest round of PPP funding

PPP second round forgiveness information

The official Paycheck Protection Program forgiveness application form, originally released on May 15, 2020, has been updated. This is the form small businesses who received a PPP loan will submit to their PPP lender when it’s time to have their loan partially or entirely forgiven.

It’s a good idea to consult with your accountant and lender with respect to actual program requirements. Access the new forgiveness application:
PPP Loan Forgiveness Application Form 3508S Revised January 19, 2021.

Do I need to take action for PPP loan forgiveness?

Yes. You must apply for forgiveness with your PPP lender through the official PPP forgiveness application. The process isn’t automatic.

What if my 1st PPP loan was not forgiven?

There are several scenarios in which you may not qualify or only qualify for partial PPP loan forgiveness.

Failure to meet the 60/40 split

If you fail to spend 60% of your PPP funds on payroll-related costs, your loan forgiveness amount may reduce. You may be able to have the amount spent on payroll costs plus a qualifying amount spent on other approved expenditures forgiven.

Failure to maintain full-time equivalent (FTE) employee headcount

If you furloughed employees and did not rehire or replace them, and you can’t prove you did your best to bring your FTE headcount back up before December 31, 2020, your loan forgiveness may be reduced. You may still qualify for a portion of your loan to be forgiven for other payroll expenses.

Failure to restore reduced compensation

If you reduced employee wages below the allowable threshold and didn’t take steps to restore their salaries by December 31, 2020, the amount of your loan forgiveness may be reduced. The point of PPP loans is paycheck protection, so the best move is to protect your employees’ income.

PPP loan payback terms

If a PPP loan is not forgiven in full (including if there has been a reduction in the forgiveness amount for an EIDL advance), any remaining balance due must be repaid and will carry an interest rate of 1.0%. However, payments are deferred for the first six months and there is no pre-payment penalty.

The lender is responsible for notifying the borrower of the loan forgiveness amount remitted by SBA and the date on which the borrower’s first loan payment is due. The lender must continue to service the loan.

The borrower must repay the remaining loan balance by the maturity date of the PPP loan (either two or five years). If a borrower is determined to have been ineligible for a PPP loan for any reason, SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.

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How to manage unforgiven PPP loan amounts

If you applied and were approved for your loan after June 5, 2020, any unforgiven amounts automatically convert to a loan at a 1% rate. You can apply for an extension to five years from your PPP lender.

Your loan payments are postponed until:

  • The date that the SBA remits the approved forgiveness amount to the lender
  • The SBA determines that a loan is not eligible for forgiveness
  • Your time to seek forgiveness lapses (although interest will accrue)
  • If you do have unforgiven loan amounts from your PPP funding, you have several options.

Repay your loan immediately

Depending on the amount of funds that are unforgiven and how you spent them, it might be wise to pay back your loan as soon as possible. You can do this without incurring any prepayment penalties or other fees. Paying off your loan promptly enables you to avoid additional interest accruing over time.

Take advantage of generous loan terms

With a 1% rate, your PPP loan has even more favorable terms than standard SBA loans. It may be better for your business to carry any unforgiven loan amount for the two- or five-year period allowed. Since you didn’t have to put up collateral for the loan or have impeccable credit to qualify, this can give you some breathing room as you figure out what comes next for your business.

SBA Issues that may affect a 2nd PPP loan

In early January 2021, The Paycheck Protection Program application portal was not allowing banks to submit 2nd loan applications if a business previously applied to have its first PPP loan forgiven and that application is still pending with SBA. However, the program's rules don't require forgiveness of the initial loan as a prerequisite for seeking a second loan.

We expect this glitch to be resolved shortly as banks have warned the current administration that the restart of the government's massive small business rescue program is facing significant operational problems preventing many employers from receiving aid.

If you received a 1st PPP loan in 2020

Even if you have not received forgiveness for your 1st PPP loan, you can apply for the second round.

Covered expenses

The allowable uses of funds for this program have been expanded to assist small businesses in covering even more of their unexpected costs as a result of the pandemic.

What can PPP loan funds be used for?

  • Payroll costs
  • Insurance benefits
  • Employee salaries and/or commissions
  • Rent payments and/or mortgage payments
  • Utilities
  • Software or cloud computing costs for business operations NEW
  • Costs related to property damage and vandalism or looting due to public disturbances not covered by insurance or other compensation NEW
  • Costs of the supply of goods that are essential to business operations NEW
  • Covered worker protection expenditures that help adapt business activities to COVID safety requirements NEW

Apply for a 1st or 2nd PPP loan now

The PPP is accepting applications through March 31st, 2020. However, it’s strongly recommended that you apply ASAP as funding may be depleted before that deadline.

If you’re ready to pursue a PPP loan, SmartBiz can help. Start an application today.

Other small business funding options

If you’ve exhausted your PPP funding or need more capital to rebuild, there are other loans out there that might be an excellent fit for these times.

A Small Business Administration (SBA) 7(a) loan is generally known as “the gold standard” in small business financing. If you have an eligible SBA 7(a) loan disbursed prior to September 27, 2020, the SBA will pay 6 months of principal, interest, and any associated fees as a result of the CARES Act.

If you’re looking for a swift and streamlined SBA 7(a) application process, consider working with SmartBiz Loans.

Our experienced financial professionals are with you every step of the way as you complete our online application and build your financial story. And if an SBA loan isn’t the best option for you, we’ll help you find the right loan for your business from our network of trusted banks and non-bank lenders.

Because we match you with the bank most likely to fund, you won’t waste time going from bank to bank.

If you’re interested in applying for an SBA loan, start the process here.

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