When You Should (& Shouldn’t) Return PPP Money & How To Return PPP Funds If It’s Not The Right Fit After All
It was a long time coming for many small businesses seeking relief through the Paycheck Protection Program (PPP). Now that they have the money and have read some of the fine print, some business owners are discovering that the program may not be a great fit for their specific circumstances.
If you have received a PPP loan but are having second thoughts about whether or not it’s a good idea to keep the money, you are not alone.
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Many Small Businesses Are Discovering That PPP Funds Aren’t The Right Fit
With normal business patterns shattered into a million pieces by the COVID-19 pandemic and associated lockdowns, many small businesses looked to the PPP as a lifeline. Particularly appealing was the promise that businesses would be able to have the loan forgiven if they met specific criteria. But after a rocky rollout that took two separate rounds of Congressional funding (so far), the SBA is only just now formally releasing the specific guidelines and application for loan forgiveness. Early reports suggest more than 30% of PPP borrowers have returned their funds so far.
Preliminary guidelines for PPP loans had established that the loans would be used to keep employee paychecks going for eight weeks. Forgiveness was contingent on at least 75% of the loan being used for payroll. Less, but still some, of the loan could be forgiven if the business decreased payroll by way of staff or salary reductions. The uncertainty about what these thresholds are, and what other expenses the money can be applied to beyond payroll, have many business owners questioning whether they made the right decision. Complicating matters further is some confusion between the PPP and the SBA’s other major coronavirus intervention, Economic Injury Disaster Loans.
Reasons To Return Your PPP Funds
Not sure if you should keep or return the money? Let’s look at some test cases.
1) You’ve Weathered The Crisis Pretty Well And/Or Don’t Need The Money
While the pandemic has been a disaster for many businesses, some were better positioned to pivot to the new paradigm than others. A smaller number may even have unexpectedly seen their sales go up. Since this is all new territory for most businesses, no one could blame you for preemptively applying when you expected the worst.
The Treasury Department does require that borrowers certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
The good news is that if you borrowed less than $2 million through the PPP, the SBA and Treasury Department have stated in their latest guidance that they will assume you asked for the loan in good faith. While you won’t have to worry about any legal issues, you may still want to consider returning the money to avoid paying interest.
If you borrowed $2 million or more and aren’t certain you can convincingly demonstrate good faith, you should return the funds immediately to avoid any potential auditing and legal troubles (at the very least, you won’t qualify for loan forgiveness and will be expected to repay the loan). The “Safe Harbor” grace period to do so currently ends May 18, 2020.
2) You Don’t Think You Qualify For Loan Forgiveness
A 1% interest loan is nothing to sneeze at, but the fact remains that many PPP borrowers took out the loan with the expectation that it would be forgiven. To qualify for full loan forgiveness, PPP funds could be used for:
- Payroll Costs: Capped at $100K/annually per employee, with sole proprietors and self-employed individuals also qualifying. No full-time salaries may be reduced by more than 25%. If you did have to cut wages, you have until June 30, 2020, to restore the salaries. It was expected that 75% of the loan’s value would cover payroll costs, including benefits.
- Mortgage Interest: Of the remaining 25%, funds may be spent on obligations incurred before February 15, 2020.
- Rent: Of the remaining 25%, funds may be spent to cover rent payments for two months so long as the lease agreement for the property was in effect before February 15, 2020.
- Utilities: Of the remaining 25%, funds may be used to pay for utility bills.
You are, of course, expected to provide documentation of your expenses. If you struggled to retain headcount and don’t see it returning to normal until July or later, you may have anticipated meeting the guidelines but fell short in practice. If it doesn’t make sense to have a loan on your books, you may want to return the funds.
3) You Don’t Think You Can Pay The Loan Back In Two Years
If you don’t qualify for forgiveness, or only qualify for partial forgiveness, you’ll be stuck with an installment loan. A 1% interest loan with a six-month deferment is, by any objective measure, an absurdly good loan. That said, if your business is struggling, you may not have the spare revenue to pay it back within that time. In that case, it may make more sense to return the funds, especially if you want to qualify for federal loans in the future.
4) Your PPP Loan Conflicts With Another Program
The confusing patchwork of CARES Act programs can be hard to navigate, especially when you’re trying to figure out which ones are mutually exclusive. For example, if you want to qualify for the Employee Retention Credit (ERC), you can’t also receive PPP funds. This might be especially annoying for businesses that didn’t know about the ERC when they initially applied for a PPP loan.
Luckily, you can still claim the tax credit if you return your PPP funds by the May 18 deadline.
5) You’re Not Going To Make It
The unfortunate truth is that it will probably take a while for the economy to rebound and business to return to normal even after the lockdowns have ended. If your projections for your business aren’t looking good, you should ask yourself whether or not it makes sense to carry this debt.
How To Return Your PPP Funds
Contact whichever lender through which you applied for your PPP loan. They can guide you through the process of returning your funds to the Treasury Department. Remember that the Safe Harbor provision expires on May 18, 2020, so if you require leniency on the good faith provision, and/or you want to qualify for the ERC, you should begin the process immediately. Other borrowers who are considering returning their funds have a little more time to make that decision.
FAQs On Returning PPP Funds
Do Safe Harbor rules apply to small businesses, and what happens if I return the money after the Safe Harbor deadline?
In this regard, the most recent guidance does not appear to distinguish between the sizes of the businesses that received funds, only the amount they borrowed. If you borrowed less than $2 million, not much will happen to you; you’ll just miss the opportunity to qualify for the ERC. If you’re simply worried about not qualifying for full forgiveness, you can still return the money after the Safe Harbor period ends.
On the other hand, if you borrowed more than $2 million and can’t demonstrate that you borrowed in good faith, you may be subject to audit and possible further legal action.
Will I have to pay interest if I return the money?
If you return your PPP loan during the Safe Harbor window, you effectively never had the loan. After that, if your loan hasn’t been forgiven, you may be considered to have made a prepayment (check with your lender to be sure). There are no prepayment penalties on PPP loans.
Are PPP forgiveness rules going to change?
Difficult to know at this point. There are still some questions regarding how strictly the 75%/25% payroll/expense split will be enforced, how partial forgiveness will work, whether the eight-week loan period will be extended, and so on. Merchant Maverick will keep you updated on any changes that come down the pipe.