The Paycheck Protection Program has provided critical relief for America’s small businesses affected by the COVID-19 pandemic. More than 155,000 small businesses from across the country received PPP funding from BlueVine alone—and the $4.5+ billion that we delivered in PPP loans helped save 470,000+ jobs.
If you received PPP funding—either from BlueVine or another lender—you might now be asking yourself “When should I apply for PPP loan forgiveness?”
Between the first round of PPP loans, the Paycheck Protection Program Flexibility Act, and other program updates, there’s a lot of information and dates to consider as it relates to your business. This post is going to help you make sense of them all, so you can determine when to apply for PPP loan forgiveness.
PPP loan forgiveness eligibility
First things first: are you eligible for PPP loan forgiveness?
Simply put, you must use 60% or more of your loan on payroll expenses (including wages, payroll taxes, and benefits) and the remaining 40% on eligible operating expenses (such as rent, mortgage interest, and utilities).
For businesses with employees, you also have to meet the following criteria:
- Rehire furloughed or laid-off employees (or show that you were able to keep your workforce intact during the pandemic);
- Reduce salaries by no more than 25% for employees with an annual salary of $100,000 or less.
When to apply for PPP loan forgiveness
If you spent all funding on forgivable expenses and have the correct documentation to submit to your lender, you can apply for loan forgiveness at any time, even before your covered period expires.
Your “covered period” refers to the timeframe you have to spend your PPP funds on eligible expenses in order to qualify for forgiveness. If you wait to apply, all payments (including principal, interest) are deferred up to 10 months after your covered period. And once you apply for forgiveness, any payments are paused until the SBA makes a forgiveness decision about your loan.
There are three PPP covered periods:
- 8-week covered period: If you received your PPP loan before June 5, 2020, you can choose between an 8-week or 24-week covered period. If you choose the 8-week covered period and would like to defer payments, you must apply for forgiveness within 10 months of your covered period, which could begin as early as April 2021.
- 24-week covered period: If you received your PPP funds after June 5, 2020, your covered period is 24 weeks.You must apply for forgiveness within 10 months of your covered period if you would like to defer payments, which could begin as early as August 2021.
- Alternative payroll covered period: If you have biweekly (or more frequent) payroll periods, you can adjust your covered period to begin on the first pay period after you receive funding (rather than the day you receive funding). This way, the covered period better aligns with your payroll schedule. Using an alternative payroll covered period does not change the cutoff to apply for forgiveness to defer payments. You can read more about this in the PPP loan forgiveness application.
Keep in mind, however, that all expenses must be incurred by the end of this calendar year, so any PPP loans received after July 16, 2020 have a covered period ending on December 31, 2020.
Choosing 8-week vs. 24-week forgiveness period
If you want to defer payments on your loan PPP and you received it before June 5, 2020, should you apply for forgiveness now, based on an 8-week covered period? Or should you opt for the 24-week period instead?
An 8-week covered period offers a few advantages:
- You may be able to wrap up the forgiveness process earlier.
- If you reduce your full-time employee count, or employee wages after the 8-week period, that might reduce your eligible forgiveness amounts if you don’t fall within the safe harbors discussed above. However, a longer, 24-week covered period gives you more time to cure any reductions in employee count or wages.
That said, you might find that using the 24-week forgiveness period provides more flexibility. In other words:
- Increase forgiveness chances. You’ll have more time to incur eligible expenses and increase your chances of getting full PPP loan forgiveness.
- Plan in advance. You’ll have more time to gather necessary documentation for your application and discuss ways to maximize forgiveness with your accountant or financial advisor before any payments are due.
- Rehire employees or restore wages. By choosing a longer covered period, you’ll have more time to restore any furloughs, layoffs, or wage reductions that would reduce your forgiveness amount.
- Wait for more updates. There’s a lot still up in the air on what’s next for the PPP, and that includes the loan forgiveness application process. Guidelines are still being finalized and new PPP legislation drafts are constantly being proposed. Many of the proposals being considered contain simplified forgiveness applications making it even easier for businesses to obtain forgiveness.
Can I apply for PPP loan forgiveness early?
Yes, you can apply for forgiveness early. You do not necessarily have to wait until the end of your covered period.
However, according to the PPP Flexibility Act, “if the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.”
How to Apply for PPP Loan Forgiveness
Regardless of the application you use, you’ll need to provide proof of eligible expenses and other documentation that shows how you used your PPP loan to keep or re-hire employees and/or cover necessary operating expenses.
You should also document and retain any records that support your PPP eligibility even if a forgiveness application doesn’t require it. The SBA may ask to see records even if they weren’t required on the forgiveness application for up to six years after your loan was forgiven.
If you got your PPP loan from BlueVine, we will email you near the end of your covered period with information on how to apply, what documents are required, etc.
For further instructions on the loan forgiveness applications, visit the SBA’s website.
What happens if I don’t apply for PPP loan forgiveness?
If you do not apply or qualify for PPP loan forgiveness, then you’ll need to repay the loan at 1% interest. Your repayment period will begin 10 months after the end of your covered period, unless you apply for forgiveness before then. If you received your loan before June 5, 2020, your repayment period will either be two or five years long. Initially, loans before June 5th automatically came with two-year terms.
Otherwise, if your loan was issued after June 5, 2020, your repayment period is five years long.
Next steps re: applying for PPP loan forgiveness
The SBA has compiled an extensive FAQ on PPP loan forgiveness, but a lot is still up in the air. We’ll continue monitoring for updates to see if the SBA announces any changes or new deadlines—or if new legislation changes application guidelines.
In the meantime—and considering the advantages outlined above—we recommend opting for the 24-week covered period and waiting until that period ends to begin the loan forgiveness application process. Because we believe 24 weeks will be best for most PPP borrowers, BlueVine has set the default covered period to 24 weeks.
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