In the wake of the novel coronavirus, small businesses across the U.S. scramble to secure the funding needed to survive the current economic downturn. While the country struggles to create and implement a national strategy to safeguard its once bolstering economy, business owners look to federal, state, and local governments for guidance on how to successfully navigate the current crisis. In response to this immediate call for action, Congress has passed two small business bailout packages over the last several months. The $349 billion for forgivable Payroll Protection Program (PPP) loans included in the initial relief package was exhausted in less than two weeks. Congress subsequently provided an additional $310 billion in relief funds, which are currently being allocated to small businesses in need.
Now in its second round of implementation, the PPP loan program includes $60 billion in set-aside dollars to be provided to small businesses by community development lenders, credit unions, and certain other smaller lenders. The intent of the set-aside is to ensure that more PPP loans reach businesses owned by people of color, as this group was not well-served with the initial round of PPP funds.
Nevertheless, for small businesses that qualify for a PPP loan, understanding how the program is structured and what lurks in the fine print is important. BWC Capital, a North Carolina-based, minority-owned and led boutique economic development consulting firm discussed with a freelance business writer the pros and cons of the loan forgiveness aspect of the program and how small businesses – particularly businesses owned by people of color – should remain vigilant about their loan status and loan forgiveness requirements under the current guidelines. BWC Consulting and BWC Capital’s operating companies were able to secure PPP loans during the first round of available funds.
“Qualifying for a PPP loan as a minority-owned business brought with it a set of hurdles that we were fortunate to navigate,” said Bridget Chisholm, BWC’s founder and managing partner. “But once we secured the loan and delved into the requirements to better understand the loan forgiveness component, we recognized the importance of helping our clients, partners, and other small business owners understand the program’s requirements and hopefully help prevent potential barriers to returning to business as usual once we reach the other side of the pandemic.”
While small businesses differ in size and revenue, their impact on the health and prosperity of the overall economy should not be misconstrued. Small businesses create more net new jobs than mid-size and large-scale businesses, and funnels resources and support directly into the local communities where they operate. However, like so many facets of American culture, inequities exist in how small businesses and minority-owned small businesses are treated. Historically, African American owned businesses struggle to access capital from traditional and nontraditional financial institutions, including banks, investors, and venture capitalists. In addition, this group of business owners experiences greater economic harm during times of economic downturns. By allocating a portion of the PPP loan funds in the second round to underserved communities, Congress acknowledged the inequity in access to capital experienced by businesses owned by people of color. Unfortunately, the disparities continue to grow in who can and who cannot meet the requirements to receive the federally-backed relief funds.
During a recent discussion with BWC’s founder and managing partner, Bridget Chisholm and BWC’s senior partner, E.L. Chisholm about their experience applying for a PPP loan, they discussed key elements to the program’s qualification structure, important deadlines, and next steps. In their own words, “the devil is in the details” and what appears to be an easily accessible solution for small businesses is instead marred by time-sensitive loan forgiveness guidelines that could lead to penalties and interest-bearing debt repayment. Here is a summary of Bridget and E.L.’s professional assessment of the loan forgiveness program:
Q: How does the PPP loan forgiveness program work?
BC: Once funds are approved by a qualified financial institution and dispersed to the small business, owners can request that their PPP loan be forgiven if the funds are spent on certain allowable expenses during the initial eight weeks (or two months) immediately following the loan being funded. To qualify for 100 percent loan forgiveness, at least 75 percent of the loan must be used to fund payroll and employee benefits costs. The remaining 25 percent can be spent on mortgage interest payments, rent and lease payments, and utilities.
EC: However, the caveat is that outstanding interest due on the loan at the time the forgiveness is requested will not be forgiven. Also, eligible loan funds must be spent during the eight-week period beginning on the date of the origination of the PPP loan. To the extent the funds were spent on non-qualifying expenses, this portion of the loan will be deemed non-forgivable and must be repaid at an annual rate of 1 percent within the two-year allotted period. A $100,000 PPP loan must, at a minimum, utilize $75,000 on direct and qualified payroll and the other $25,000 is eligible to be spent on qualified business expenses (QBEs), such as mortgage interest, rent and lease expenses, utilities, and indirect payroll costs such as healthcare expenses paid by the employer. The total amount can be spent on payroll to the extent the payroll was used on eligible employees.
Q: So, PPP loans are not automatically forgiven?
BC: No. It is important to remember that a PPP loan is NOT automatically forgiven. Small businesses must proactively request loan forgiveness from the participating bank that provided the loan. If your business received a loan, you should contact the bank prior to the end of the initial eight-week covered period and inquire about the formal process required to request that the loan be forgiven.
Q: What do small businesses need to know about the eligible business expenses that banks will need to verify to qualify them for loan forgiveness?
EC: The borrower will likely be required by the bank to provide documentation to confirm that loan proceeds were spent on eligible PPP expenditures. These expenses include:
Payroll Costs. This is considered the employee payroll approved by the bank that provided the PPP loan. This also includes health insurance, employee 401-K match, and unemployment insurance costs. Payroll expenses are capped for individuals earning over $100,000.
Interest on Mortgage Obligation(s). This includes mortgage obligations incurred by the business that is a liability of the PPP borrower and incurred prior to February 15, 2020 – this applies to real or personal property.
Rent Payments. This includes a payment obligation under a lease agreement that was in force prior to February 15, 2020.
Utility Expenses. This includes expenses incurred by the business, such as electricity, gas, water, transportation, telephone, and internet services that were in service prior to February 15, 2020.
Q: How long does a small business have to start repayment of a non-forgivable PPP loan?
EC: Lenders are required to grant borrowers a deferment of principal and interest payments on the PPP loan for at least six months and no longer than 12 months. After this maximum 12-month deferment period, borrowers must begin making principal and interest payments on the loan unless the loan is forgiven prior to the end of the 6-12 months deferment period. If the small business meets all the loan forgiveness requirements and the bank approves their loan forgiveness request, the business will not be required to make any principal payments.
What is important to remember, any accumulated interest accrued during the 6-12 months payment deferment period will not be included as part of the loan forgiveness amount – meaning the borrower will be required to pay this interest amount.
Q: Are there major penalties for taking an unnecessary PPP loan?
BC: Yes. Knowingly making a false statement to obtain a guaranteed loan from the Small Business Administration (SBA) is punishable under 18 USC 1001 and 3571 of the federal code by imprisonment of up to five (5) years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of up to two (2) years and/or a fine of not more than $5,000; and, if submitted to a Federally insured institution, under 18 USC 1014 by imprisonment of up to thirty (30) years and/or a fine of not more than $1,000,000.
Understanding how the repayment amount is determined, if applicable, is based on factors calculated by the financial institution that provides the loan. This could be tricky and confusing because partial payments will be based on when employees were rehired and what happens if borrowers fail to use the funds as promised. The BWC team strongly encourages borrowers to contact their lender to stay abreast of any changes in the program and to keep good records of their qualified expenses. As for small businesses owned by people of color, BWC advises these businesses to remain focused on the details, ask questions, and be prepared to meet all guidelines in a timely manner.