On June 5th, the Paycheck Protection Flexibility Act (PPFA) was signed into law by President Trump in an effort to increase assistance to more US businesses impacted by the virus-induced economic shock…
Back in late March, the first round of Paycheck Protection Program (PPP) money, totaling $349 billion, disappeared in just 13 days. The hastily created stimulus plan was designed to help American businesses keep their employees on payroll during the shutdown imposed by 42 state governors. Confusion over how to apply for PPP loans was widespread and complaints that the money was going disproportionately to larger businesses were rampant.
On April 27th, another $310 billion in funding for the program was announced. By that time some of the rough edges in the program were smoothed out. More of the money is now getting to smaller businesses and roughly $100 billion of this second installment is still available to fund new PPP loans.
The PPFA was passed to ease restrictions on the terms of PPP loans, all or a portion of which may be forgivable under the program guidelines. Let’s take a quick look at the enhancements offered by the PPFA.
1. Under the original program, a minimum of 75% of the PPP loan proceeds had to be spent on maintaining payroll for the loan proceeds to be forgiven. The PPFA lowers that threshold to 60%, which is meant to help those businesses that are not as employee dependent and have other major costs of operation. This means that up to 40% of borrowed funds may be forgiven, even if spent on other eligible expenses, including rent, utilities and transportation.
2. Borrowers will now have 24 weeks from the date the loan was originated to spend the money and still be eligible for forgiveness, up from 8 weeks under the previous rules. The extra time will help defray the expense of reopening businesses during a time when revenue from operations is still below normal levels.
3. For the portions of a PPP loan that are not eligible for forgiveness, borrowers now have 5 years to repay rather than the 1 year period under the original rules. Payments commence 6 months after the date of loan origination and carry an interest rate of just 1%. So, the monthly payment on the unforgiveable portion of PPP loan equaling $250,000 based on a 5-year term would be $4,273, rather than $20,946 per month for 12 months under the previous rule. Clearly, this will be welcome relief for those businesses that take longer to fully recover from the impact of the economic shutdown.
4. All of the new rules outlined in the PPFA are retroactive to the beginning of the program. That means that some businesses who got their PPP loans back in April may see an increase in the forgivable portions of their loans.
There are other changes associated with the passing of the PPFA, but these are the ones getting the most attention. If you already have your PPP loan funds, applications for loan forgiveness are available through the SBA website.
If you haven’t applied for your PPP loan, funds are still available. Even if you use your funds for expenses not eligible for forgiveness, access to a pile of dry powder on such good terms may be a good call. If you don’t use it, you can send it back with penalty.