PPP Loan Forgiveness: Deciding Your Next Steps

You were approved for Paycheck Protection Program (“PPP”) funds, now what? How can you position yourself to maximize loan forgiveness? Information is changing quickly, and we strive to keep you up-to-date on changes as the Small Business Administration and the Treasury Department clarify the currently ambiguous terms.Properly utilizing the PPP funds may require a significant effort on behalf of your company’s leadership team. Borrowers may be surprised when a portion of the PPP funds turn into a loan without the subsequent cash available to repay. The initial $349 billion program allocation was exhausted on April 16, 2020, however, Congress is expected to discuss appropriating additional funds. While we believe it makes sense for most companies to apply for the PPP, some businesses that were approved in round 1 may now find it more advantageous to immediately return the loan funds because they do not expect to achieve a high enough forgiveness. Others may choose to utilize the funds as a low-interest loan to support a delayed re-opening. As we await further guidance, you can begin to create a PPP loan forgiveness strategy by answering three questions:

• How long will the PPP funds sustain my business and what is my short-term liquidity?
  • Funds can be spent on payroll and certain non-payroll costs like rent and utilities. For some businesses, especially with mild to moderate revenue decreases, the PPP proceeds can provide a short-term liquidity benefit. This improved cash position can provide relief into future months as the economy rebounds. For larger revenue declines, other capital and liquidity planning can be identified and those plans can be executed in the coming weeks.
  • KEY POINT: Developing an intermediate cash flow forecast before accepting the PPP proceeds gives leadership increased visibility and aid in operational decision making.
• What is my forgiveness amount?
  • Forgiveness is based on what is expensed from the PPP loan proceeds, at least 75% on payroll costs and the remaining portion on rent, utilities, and mortgage interest (non-payroll costs) as well as maintaining headcount. Re-hiring strategies need to be considered if layoffs or furloughs were made prior to receiving PPP funds.
  • KEY POINT: Should payroll costs not be maintained, a situation could occur where the borrower will be surprised when some or all of the PPP loan funds are not forgiven. The forgiveness calculation can be complex, because forgiveness is only granted on what is spent (not borrowed), and it is further reduced if you are unable to restore your previous headcount. This is a reflection of the program’s intent to return employees to payroll and only provide forgiveness to borrowers who can effectively do that. Creating a projection with a PPP loan forgiveness calculation can reduce any surprises at the end of the eight week covered period.
• How do I properly document that the funds have been spent correctly?
  • Be prepared for a rigorous forgiveness process. Timely and accurate financial reporting will never be more important – retain information verifying full-time equivalent employees on payroll and pay rates, payroll tax filings, payroll reports, bank statements including canceled checks, payment receipts, lease agreements, mortgage statements, and copies of utility invoices.
  • KEY POINT: Utilize expense tracking tools and forgiveness calculations, maintain communication with your financial institution, “check-in” with your relationship manager at week four, and apply for forgiveness quickly.

We've built this simple decision tree as a resource to help you determine the path that may be right for your business when evaluating planned fund spending.

We can help

We are here to help if you need support determining your cash flow in the next 8-10 weeks to determine your forgiveness eligibility, working with your bank, or simply maintaining your records to increase your likelihood of receiving forgiveness. Contact a member of the Elliott Davis team or fill out the form below.For more helpful resources to navigate COVID-19, visit the Elliott Davis COVID-19 Resource Center.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change as a result of rapidly evolving legislative developments and government guidance.