Banks Make Hard Line With PPP Loans

Last Update: December 4, 2021 • Financial News •

While the Paycheck Protection Program (PPP) acted as a lifeline for struggling businesses during the pandemic, the unforgiving nature of U.S. lenders is now a hot topic of discussion.

For context, the U.S. Small Business Administration (SBA) defines a PPP loan as an SBA-backed loan that allowed businesses to maintain their staffing levels during the COVID-19 crisis. And the program officially ended on Mar. 31, 2021.

However, as banks delve through the expenditures submitted by U.S. businesses during the pandemic, their accountants are letting clients know that certain proceeds don’t qualify for loan forgiveness.

What Is a PPP Loan?

With a massive spike in unemployment unfolding during the pandemic, PPP loans helped protect employees while U.S. businesses’ sales recovered.

Moreover, with mobility restrictions and lockdowns imposed by the U.S. government, supporting the private sector was necessary.

To that point, the SBA allowed beneficiaries to receive funding for these eligible expenses:

Rent
Utilities
Payroll expenses
Mortgage interest
Personal protective equipment (PPE)
Uninsured property damage that resulted from the pandemic

Moreover, all loans included a 1% interest rate, and borrowers did not pledge collateral. Also, PPP loans issued before Jun. 5, 2020 have a two-year payback period, while PPP loans issued after Jun. 5, 2020, have a five-year payback period.

Qualifying applicants included:

Sole proprietors, independent contractors and, self-employed persons with 500 employees or less.
Some exceptions were made for larger businesses as long as they met other requirements.

To Forgive or Not to Forgive

According to the SBA, loan forgiveness is attainable at any time before a PPP loan matures. However, first and second-time borrowers were required to follow these essential rules:

First Draw PPP Loan forgiveness terms:

Maintain the same staffing and compensation levels present pre-pandemic.
Allocate all of the loan proceeds to payroll and eligible expenses.
Allocate at least 60% of the loan proceeds to payroll costs.
Ensure that these guidelines are followed during the eight to 24-week eligibility period after receiving the loan.

Second Draw PPP Loan forgiveness terms:

Maintain the same staffing and compensation levels present pre-pandemic and during the First Draw PPP loan.
Allocate all of the loan proceeds to payroll and eligible expenses.
Allocate at least 60% of the loan proceeds to payroll costs.
Ensure that these guidelines are followed during the eight to 24-week eligibility period after receiving the loan.

From Overjoyed to Overdue

While the PPP has the best intentions, some borrowers now find themselves with hefty bills and accusations of over-funding. For example, claimants were only allowed to expense employees’ salaries up to $100,000.

As a result, for sole proprietors and independent contractors — small businesses that have no employees — the PPP loan limit was $20,833. However, for small businesses that expensed amounts above $20,833, the remainder does not qualify for loan forgiveness.

Thus, many sole proprietors and independent contractors have to pay back the proceeds at 1% interest over the next five years.

If a Portion of My PPP Loan Is Not Forgiven, Can I Appeal the Ruling?

Unfortunately, there is no appeals process in place right now. As a result, neither the SBA nor participating lenders allow you to plead your case. In a nutshell, banks insist that borrowers, not the lender, understand the terms of their PPP loans. Likewise, banks are absolved of any liability, even if they approve the expenditures during the loan application process.

Thus, it’s vital to understand the terms of your loans and to read the fine print. Moreover, this advice stretches beyond PPP loans: whether it’s an auto loan, personal loan, student loan, payday loan (which we strongly advise against), or something as simple as a mortgage or purchasing insurance, please take the time to consider all of the implications.

And while we know that the process is often exhausting, we’re here to help. If there is anything about a prospective loan that you don’t understand or need clarification on, please contact us, and we’ll respond promptly.

Conclusion

While PPP loans helped uplift struggling small businesses, some participants have gotten more than they bargained for. And while the hard lesson should accelerate borrowers’ learning curve in the future, the SBA and lenders should have ensured that eligibility requirements were presented clearly. Unfortunately, however, given the ferocity of the pandemic and the speed at which it hit, mistakes were made. As a result, the program suffered plenty of hiccups along the way.