If you received a Small Business Administration loan under the Paycheck Protection Program this year, chances are your bank has reached out to you recently. No, you are not in trouble with your bank. On the contrary, your bank is likely sending you worthwhile information regarding the terms of your loan, as it relates to an important program update.
Back in April of this year, we discussed the CARES Act and the various programs within it. Initially, the terms of the Paycheck Protection Program (PPP) stated that borrowers would have limited flexibility in repayment options. Specifically, payment deferrals would extend up to six months after disbursing funds . However, the coronavirus pandemic continues to affect small businesses, and therefore the Small Business Association released an important Paycheck Protection Program update. The program update is officially the Paycheck Protection Program Flexibility Act.
In case you missed it, here is the information you need to know about the program update. Hopefully this will help you understand why you are receiving recent communication from your bank.
CARES Act and PPP
Now, just to make sure you are up to speed, here is a recap of the PPP. In response to the coronavirus pandemic, the federal government passed the CARES Act, which is the Coronavirus Aid, Relief, and Economic Security Act. Under that umbrella, the Paycheck Protection Program emerged. The purpose of the program was to assist small businesses on the verge of collapse due to lost revenue amid stay-at-home orders. The goal was to prevent small businesses from losing employees and going under. While the funds available through the program were limited, many small businesses benefited from the program.
Paycheck Protection Program Flexibility Act
Then, in June, the government rolled out the Paycheck Protection Flexibility Act (PPPFA). This program update did two important things. First, the program update extended the initial deferment period, which was six months. In other words, borrowers would not have to begin paying back the principal and interest immediately after six months post-disbursement. Instead, the deferral period now extends through December 2020. Second, the program update expands the conditions under which the loan amount could be eligible for forgiveness. These program updates are retroactively considered for any SBA loan originating under the Paycheck Protection Program.
Drilling into the Program Update
So, while the aforementioned are important, there are actually more details you should know about the Paycheck Protection Flexibility Act. Here they are at a glance:
- Forgiveness Covered Period and Deferral Extension – The program update allows employers more time to use the loan funds after the disbursement date (the earlier of (i) 24 weeks thereafter and (ii) December 31, 2020). Also, the SBA does not require the borrower to begin paying principal and interest until the date the SBA provides the lender with the applicable forgiven amount. The borrower has 10 months after the end of the covered period to apply for forgiveness.
- Forgiveness Limitations Change – In order for the loan to be fully forgiven, at least 60% of the loan proceeds must be used for payroll costs, and borrowers may use up to 40% for other approved purposes. This is an increase over the previous 75%/25% under the PPP.
- Employee Reduction Revamp – While forgiveness was previously reduced in line with reducing employee headcount during the pandemic, that will no longer be an issue under the program update. This is contingent, however, upon the employer’s ability to document the appropriate reasons for the reduced employee headcount.
- Payroll Tax Deferral Adjustment – Previously, employers who received an SBA loan under the PPP were not eligible for the payroll tax deferral. The program update no longer excludes them.
- New Loan Maturity Extension – The Paycheck Protection Program Flexibility Act changed the PPP loan maturity date from two to five (5) years.
Your Bank and the Paycheck Protection Program Update
As you go through this time of uncertainty, it’s good to know that someone has your back. Your bank, and other trusted business partners, want to see you succeed, and want to help where they can. That’s why they notified you of the Paycheck Protection Program update. Know that Journey is part of your network, and intent upon making sure you are receiving the most beneficial information for you to continue to operate your business. So, stay tuned for more important program updates as they roll out.
For more information about the Paycheck Protection Program Flexibility Act, click here.