[Editor’s note: This is a guest post from Susan Doktor. She is a journalist and business strategist who hails from New York City. She writes on a wide range of topics including finance, technology, and workplace issues. Follow her on Twitter @branddoktor.]
Fintech companies, give yourselves a pat on the back. You came into a situation that was a hot mess and made it manageable. In the process, you performed something of a miracle for millions of business owners. You did well by doing good.
We’re talking about the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). You did a great job! But the job’s not over yet.
The PPP officially ended back in August 2020. Given the government’s (now legendary) inability to negotiate and pass a new pandemic relief package, there’s no telling if it’s coming back or the extent to which it will be funded. But during its two funding rounds, the program backed over $520 billion in small business loans. The fintech industry, by breaking through the loan application logjam, was instrumental in helping a unique segment of small business owners: businesses with fewer than ten employees, including the self-employed.
PPP loans are unique themselves. Even the best commercial personal or small loans can’t offer the best feature of PPP loans: under certain proscribed circumstances, the loans are eligible for 100% forgiveness. And that’s the next task for fintech companies—ensuring that loan recipients plot a direct course towards forgiveness so they reap one of the most important benefits of the program. Savvy marketers in the fintech industry will certainly recognize the opportunity to cement customer relationships by serving as PPP authorities around this crucial issue.
Changes Under the Paycheck Protection Program Flexibility Act
So what do PPP loan recipients need to know—and do—about seeking loan forgiveness? One of the most important facts you can pass on to your customers is that PPP loan forgiveness regulations have changed since the program’s launch. On June 5, 2020, Congress ratified the Paycheck Protection Program Flexibility Act. There’s quite a bit of good news there for small business owners. But there are also a couple of potential pitfalls you can help customers avoid.
Here’s what we know to date:
The terms of the PPP Flexibility Act apply to all PPP loans, regardless of when they were granted. The Act is retroactive to the beginning of the PPP program. That’s great news for early borrowers.
While initially employers were required to use PPP funds within eight weeks of receipt, that period has been extended. Loan proceeds must now be used within 24 weeks of receipt or before December 31, 2020. Fintech lenders can support their borrowers by contacting them as their spend deadlines approach. Businesses may still choose to spend within the original 8-week period, however. They won’t be penalized for doing so.
Mark December 31 on your calendar in boldface and underline it in red. Twice. Borrowers must apply for forgiveness before that date to qualify. This is another opportunity for fintech lenders to be proactive in service to their customers. Loans, in general, are complicated and PPP loans come with more complications than most. Don’t take it for granted that customers are entirely mindful of their obligations under the PPP. This is the do-or-die deadline.
Eligible expenses—both payroll and non-payroll—remain unchanged under the PPP Flexibility Act. But again, it wouldn’t hurt to reach out to your PPP customers and remind them of PPP expense eligibility rules to help them maximize the loan forgiveness opportunity.
Now we come to a tricky part of the new rules. The percentage of PPP loan proceeds required to be used for payroll costs was reduced by the PPP Flexibility Act from 75% to 60%. Business owners who had back rent, utilities, and other debts to pay in addition to payroll expenses can applaud that change. But here’s the rub. If borrowers fall below the new 60% threshold, under the PPP Flexibility Act, no part of their loans can be forgiven. Previously, forgiveness was reduced on a pro-rata basis for borrowers who failed to meet the threshold. Now, that threshold amounts to an on/off switch for forgiveness.
For loans that are not eligible for forgiveness, borrowers now have five years instead of two to pay them off. The interest rate on those loans remains unchanged at 1%
The PPP Flexibility Act includes a new exemption. Previously, when borrowers were unable to hire back all of their staff due to employee unavailability or loss of business, the amount eligible for forgiveness was reduced. That’s no longer the case.
Under the rules PPP Flexibility Act, employers may defer payment of payroll tax until December 31, 2020, without regard to whether or when PPP loan forgiveness is granted. That’s true for all borrowers, regardless of whether their loans are eligible for forgiveness.
The Paper Path to Forgiveness
Customers are likely to find the paperwork required to file for forgiveness confusing at best and onerous at worst. Fintech companies can support borrowers by assisting during the application process. In addition to filing an application form, borrowers will be required to attach various schedules to document how and when PPP funds were used.
Paperwork requirements vary. The type of business a borrower operates and the amount of money borrowed are among the factors that drive which forms need to be filed. In addition, forms may vary depending on whether a business had to reduce its workforce or wages due to COVID-19 restrictions issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration,. Here’s a rundown of the three application forms borrowers might need to file.
Forgiveness Application 3508S is the simplest of the three forms the SBA makes available to borrowers. It’s designed only for businesses that borrowed less than $50,000. Businesses that file this form may be exempt from any reductions in their loan forgiveness amount based on reductions in full-time equivalent (FTE) employees or reductions in employee salary or wages. However, if a business is affiliated with other businesses (for example, a subsidiary company of a company with many business holdings ) that borrowed more than $2 million, it isn’t eligible to apply for forgiveness using this form.
Forgiveness Application 3508EZ is a simplified form that, in general, may be used by self-employed individuals, independent contractors, and sole proprietors who borrowed less than $50,000. Larger businesses that reduced labor costs by less than 25% during the covered period may also be eligible to use this form. This form does require businesses to calculate payroll and non-payroll costs.
Forgiveness Application 3508 is the most complex PPP loan forgiveness form a business can file. Any business can use it, but unless a business is ineligible to file either of the other applications, it’s not worth the trouble. Borrowers using this form are required to do a lot of extra calculations to arrive at the final amount of forgiveness. They’ll need to take into account payroll and non-payroll costs, any reduction in full-time equivalency and wage reductions, as well as the 60% payroll usage requirement.
One Last Tip
If you’ve been following the PPP story from the beginning, you may be aware that the program has been somewhat fluid. More changes may come our way, particularly if Congress passes new legislation to fund the PPP program. To the best of our knowledge, the information we’re providing is valid as of November 13, 2020. We urge you to periodically check in with resources published by the SBA for the latest news on the PPP to be sure you’re giving your customers the right advice at the right time.