By Tom Van Hemelryck, Idaho Region President for WaFd Bank
The COVID-19 pandemic has presented a formidable global challenge, and the U.S. — with about a third of worldwide cases — has felt the effects from coast to coast. Efforts to contain the spread of the novel coronavirus to protect the health of Americans and avoid overwhelming health care systems have helped to flatten the curve, but have also come at an economic cost. Stay-home orders closed non-essential businesses, leaving countless business owners and their workforces mired in uncertainty. While phased re-openings have begun, the impacts on business continue.
To provide a level of economic security, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, providing more than $2 trillion in economic relief for individuals, families, businesses, and local and state governments. Part of that legislation included an unprecedented Paycheck Protection Program (PPP), which provided $349 billion to businesses in potentially forgivable loans if they kept their workers on the payroll for eight weeks and used at least 75% of their loans for payroll expenses.
SBA administers, provides guidance on PPP
Launched on April 3 and administered by the Small Business Administration, the first round of PPP funding was exhausted within two weeks. A second round of $310 billion in funding opened up on April 27. As the program is still in its relative infancy, many questions are arising about qualifications for funding and for perhaps the biggest selling point: loan forgiveness.
Banks and other lenders are working with the SBA to gain as much clarity about the parameters of the program as possible and communicate updates to their customers. As borrowers consider the prospect of what could amount to a no-cost loan, it is important that they first determine if the funds will be used in a way that is consistent with the intent of the PPP and with the stipulations for forgiveness before claiming and disbursing funds.
Is PPP right for your business?
Small businesses with no more than 500 employees are eligible to apply for the PPP, including sole proprietorships, independent contractors, the self-employed, as well as nonprofits, veterans organizations and tribal concerns. To determine a total count of employees, applicants must do a headcount, including those employed full-time, part-time or on another basis.
Applicants can request funding up to 2.5 times their average monthly payroll for the preceding 12 months, up to a maximum of $10 million. Payroll costs are capped at $100,000 in cash compensation per employee, on an annualized basis, and include salary/wages, commissions, and tips. Payroll expenses may also include employee benefits, such as health insurance, vacation or paid leave, retirement benefits, and state and local taxes on earnings.
The loans do not require collateral or personal guarantees, and borrowers are not subject to any government or lender fees. Any loan amounts not forgiven will have an interest rate of no more than 1%, and repayments will be due beginning six months after disbursement. The total remaining interest and principal will need to be repaid within two years of that initial disbursement date.
Requirements for having your loan forgiven
In order to have a PPP loan fully forgiven, a borrower must keep all employees on their payroll for eight weeks. The clock starts ticking on the date the lender makes funds available to borrowers, which should be within 10 calendar days from the time of a PPP application’s approval. Business owners who may not need the funds immediately must weigh the risk of receiving a disbursement too soon versus not receiving resources at all if funding runs out again.
To qualify for forgiveness, borrowers must allocate at least 75% of the loan to payroll expenses, including any benefits, and employers must maintain staff or rehire quickly. The remaining 25% or less may be used for other qualified expenses, such as mortgage interest incurred before Feb. 15, 2020, as well as rent or lease agreements in place or utilities engaged in service before that date.
The amount of a loan that is forgiven may be reduced if businesses fail to meet the requirements above. Additionally, loan forgiveness will be reduced if a borrower reduces wages or salaries by more than 25% for anyone earning less than $100,000 in 2019, or if the headcount of full-time-equivalent employees declines over the eight-week period.
According to guidance from the U.S. Treasury, employers who make a good faith effort to rehire employees at their same rate of compensation and hours, but receive documentation of an employee’s rejection of the offer, may qualify for an exception to the headcount rule. Of course, employees who reject a rehire offer may forfeit their unemployment compensation eligibility, so it would be in the best interest of both borrowers and employees to provide full disclosure and transparency in terms of a rehire agreement.
Improving your prospects for full loan forgiveness
If you have decided that a PPP loan is the best option for your business, the following steps will help improve your chances of having a loan fully forgiven.
- You must apply for forgiveness: First, know that you will need to place a request with your lender once the eight-week period expires. On May 15, 2020, the SBA released the PPP Loan Forgiveness Application, which can be submitted electronically or on paper to your lender. The three-part form will walk you through all the calculations needed to arrive at the forgiveness amount.
- Maintain detailed records: Next, make sure that you maintain all proper documentation of payments to substantiate your claim. The application for forgiveness details all documents that must be submitted with it, and those that each borrower must maintain but is not required to submit. For instance, be ready to provide proof of the number of FTE employees, pay rates and other payroll expenses, as well as documentation supporting non-payroll expenses of mortgage interest, rent or utilities.
The PPP Loan Forgiveness Application will serve as a borrower certification form, confirming that documents are true and that the PPP loan was used for its intended purposes. Lenders can help direct borrowers to the proper forms and channels to help expedite the process. Once a completed application for forgiveness is submitted, businesses should expect to receive a response within 60 days.
WaFd is here to help
WaFd Bank has helped more than 6,000 small businesses obtain loans through the PPP, including almost 400 in Idaho. We are continuing to accept applications and are navigating borrowers through to the other side: loan forgiveness. If your business is exploring options to get through the economic challenges during the pandemic and needs guidance in making the most of the federal government’s stimulus package, please find more information on our website or get in touch at https://www.wafdbank.com/.
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Tom Van Hemelryck is a banking industry veteran and has been in this business for more than 30 years. As Idaho regional president, Van Hemelryck oversees WaFd Bank’s commercial and retail banking at 24 locations throughout Idaho. WaFd Bank is the second largest national bank headquartered in the Pacific Northwest, with over 2,000 employees and 234 branches across eight western states.