Although the COVID-19 pandemic has taken a toll on the economy, small businesses are perhaps the most affected. More than 100,000 small businesses have closed permanently over the course of the ongoing recession, and more are at risk of a similar fate if COVID-19-related restrictions continue to change the way local establishments operate.
If you are a small business, you may have received a loan for Paycheck Protection Program (PPP) earlier in the pandemic. Many small businesses applied for assistance in April when it first became available, and received funding later that month than in May.
PPP loans are particularly appealing to small business owners for one big reason: They are eligible for full forgiveness provided that 60% or more of their proceeds are used to cover the labor costs. More than 5 million small businesses have already received PPP funding, and the program has saved millions of jobs in recent months.
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This week, the Small Business Administration began asking PPP loan recipients to forgive that debt. But you might want to refrain from taking this step.
Why it pays to sit tight
The rules for forgiving PPP loans have been evolving since the program was first rolled out. Initially, companies had to spend 75% of their loan proceeds on payment transactions to qualify for forgiveness, but that threshold was later reduced to 60%. Small businesses have also been given more time to use their loan funds since the program began.
Other provisions regarding forgiveness may also be amended. For example, it has only recently become clear that employers’ payments for vision and dental benefits are considered under the umbrella of payment costs. In the coming weeks, there is a good chance that more clarity will emerge, and that is why small business owners do not necessarily have to rush to simply apply for forgiveness for loan.
There has also been (unofficial) talk of forgiving all PPP loans that fall below a certain dollar threshold. Businesses that have received modest loans, however, do not have to process the process to apply for forgiveness.
While all recipients of PPP loans have no doubt to forgive that debt, the reality is that PPP loans come with very affordable loan terms. Loans issued before June 5 must be repaid in two years at 1% interest. Those issued after June 5 can be repaid in five years with 1% interest. When it comes to loans, it actually does not get cheaper than that, so companies that fail to repay their PPP loans in whole or in part may not necessarily be out of luck.
There has also been talk of a second round of PPP funding for hard-hit companies. That second round has not yet been set in motion, but lawmakers have recognized the need for additional assistance to small businesses in the course of their stimulus negotiations, and Republicans have gone so far as to include a second PPP round, with strict requirements, in their recently proposed HEALS Act.
