WASHINGTON, DC – July 17: Steven Mnuchin, United States Secretary of the Treasury, speaks during a Small Chamber … [+]
To date, the Paycheck Protection Program (PPP) loan program has provided more than 4.6 million loans, totaling more than $ 520 billion. While the program was implemented and suffered through a troublesome launch, it has been praised for helping small businesses keep their doors open and helping keep employees off unemployment charts.
The program proved so successful that the first tranche of money quickly ran out, requiring another round of funding. Now, however, the reality of processing these loans is leading some organizations to wonder how feasible it will be to handle such a large amount of loans efficiently.
Call for forgiveness of PPP loans
Last month, two bank lobbying organizations asked Congress to automatically forgive PPP loans of less than $ 150,000.
At the time of the proposal, records showed that PPP loans below $ 150,000 represented approximately 86% of loans made under the PPP loan, but only 26% of the loan dollars. Or to put it another way, only 14% of total loans represents 74% of the funds loaned under the program.
These smaller loans are the least profitable for banks and can be an administrative burden on small businesses at a time when many are struggling.
The lobbying group wrote that “the resources and time of small business owners would be better focused on getting the economy to work safely again, not on processing heavy paperwork.”
Yesterday, Treasury Secretary Steven Mnuchin appeared to endorse this proposal while testifying before Congress. He suggested that not all PPP loans should be verified. He went on to say: “One of the things we will talk about is whether we should have some forgiveness for small loans. I think it’s something we should consider. ”
Mnuchin recommended that any forgiveness program include protection against fraud. She then recommended additional loans aimed at helping minority-owned small businesses and allowing businesses in industries that have been hit hard to apply for a second PPP loan. Any additional loans would include provisions to help prevent fraud, waste, and abuse.
The rules of forgiveness of the program are complicated
Small businesses can have all or part of their PPP loan forgiven if they meet certain criteria. These rules have changed several times since the launch of the program, causing confusion among many small business owners.
In summary, some or all of the funds loaned under the PPP loan program may be forgiven if 60% or more of the funds were used for payroll expenses. The remaining funds must be used for qualified expenses to be forgiven. These qualified expenses include rent, utilities, and mortgage interest payments.
Of course, there is a lot of fine print, which is covered in detail in this article, by Forbes contributor Brian Thompson.
The five-page PPP Loan Forgiveness Application can be found on the SBA website.
Forgiving smaller loans would benefit more than small business owners
Forgiving loans of less than $ 150,000 could benefit small business owners, banks, and even the government.
These loans only represent 26% of the funds provided under the PPP loan program, however, they represent 86% of the total number of loans. This is a huge administrative burden to represent such a small percentage of the total funds.
Providing a general forgiveness for these loans, or loans under a similar threshold, frees up both bank and government resources to process higher value loans. This comes at a time of increased scrutiny around companies that received large PPP loans.
Government resources would be better served by focusing on larger loans and investigating possible fraud, including possible fraud under any threshold of potential forgiveness.
Banks will benefit due to reduced overhead costs. Banks are ultimately responsible for determining loan forgiveness. Undue PPP loans are converted to 2-year or 5-year loans at 1% interest. A study by consulting firm AQN Strategies estimated that the cost of servicing PPP loans of less than $ 50,000 will ultimately cost banks around $ 500 million. Forgiving these small loans will save banks millions of dollars.
Finally, small business owners would also greatly benefit from receiving general forgiveness. This would remove the burden of applying for loan forgiveness and allow business owners to focus on keeping their businesses operational at a time when many owners are pressed for time and resources.
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