Forgivable SBA Loans & What to do if Forgiveness is Denied

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By: Bill Henry
PublishedApr 7, 2020
5 minute read

Your small business may be eligible for a forgivable SBA loan. If you don’t exactly follow the loan’s guidelines, you could be denied loan forgiveness.

loan forgiveness

Non-essential small businesses around Colorado are closed due to a state-mandated Stay-at-Home Order. Owners of shuttered storefronts are grappling with how they will continue to pay their employees. Even small businesses that remain open face financial hardship because people have reduced trips out for necessities.

In an effort to help small businesses, the CARES Act (Coronavirus, Aid, Relief, and Economic Security) provides financial assistance for small businesses through expanded Economic Injury Disaster Loans (EIDLs) and the Paycheck Protection Program.

Your small business may have to pay back only some of the loan, or none at all, depending on how you used the loans.

It’s critically important that you understand and follow the forgiveness guidelines so you do not end up owing more money than you anticipated. You should also know what to do if you are denied forgiveness.

If your loan forgiveness is denied call us at (303) 688-0944. You can also schedule a meeting with an attorney online.

Loans Available for Your Small Business

The Paycheck Protection Program

The $2 trillion CARES Act reserves $349 billion for government-backed Paycheck Protection Program (PPP) loans from private lenders. The loans will help qualifying small businesses maintain payroll during the novel coronavirus pandemic.

More than 800 SBA-approved banks across the country will issue the loans. So you will work directly with an approved bank.
Generally, the SBA requires that you exhaust other credit resources before seeking a loan from it. However, the SBA is waiving that requirement for this program.

These businesses qualify to apply:
  • Small businesses with fewer than 500 employees
  • Some industries with more than 500 employees
  • Restaurants and other hospitality businesses with more than one location may be eligible if individual locations have fewer than 500 employees
  • Sole proprietors
  • Independent contractors
  • Self-employed individuals
  • 501(c)(3) nonprofits
  • Tribal businesses
  • 501(c)(19) veteran organizations

Additionally, your business must have been in operation on February 15, 2020 and you were paying salaries and payroll taxes for your employees or independent contractors.

Your employees’ primary residence must be in the U.S. So if you’re paying people do to work for you overseas, their salaries cannot be counted.

You will have to submit supporting documentation.

You who are NOT eligible for a PPP loan if:
  • you employ household workers, such as a nanny or housekeeper.
  • you are currently behind on or have defaulted on a direct or guaranteed SBA or federal loan within the last seven years and caused the government to lose money.
  • an owner of 20 percent or more of the equity of the applicant is incarcerated, on probation or parole; presently subject to an indictment, criminal information, or arraignment that could result in criminal charges; or has been convicted of a felony in the last five years.
  • you operate an illegal business.

What Can the Money be Used For?

Payroll is the most important piece of the PPP loan. The loan, though, can also be used to pay for your lease, mortgage, utilities, and other debt obligations you cannot pay for right now.

 How Much Can You Borrow?

The maximum loan amount has been capped at $10 million. However, the amount you will be able to borrow is unique to your business and its annual payroll costs.

Important Salary Note: PPP loans can be used to pay up to $100,000 of an employee’s salary. This does not mean you cannot take out a loan if you have employees who make more than $100,000. Instead, the first $100,000 of their salary is considered when you calculate how much you can borrow.

The CARE Act provides a number of ways to calculate the maximum amount you can borrow, but the U.S. Treasury Department lists the following five-step method as the one most applicants will find most useful:

Step 1 Add up payroll costs from the last 12 months for employees whose principal residence is in the U.S.

Step 2 Subtract any employee compensation that exceeds a $100,000 annual salary

Step 3 Calculate your average monthly payroll costs

Step 4 Multiply the average monthly payroll costs by 2.5

Step 5 If you received an Economic Injury Disaster Loan between January 31 and April 3, 2020, add the outstanding amount minus any “advance” under an EIDL COVID-19 loan since the advance does not have to be repaid.

Here are some examples:
Example 1 – No employees make more than $100,000

Let’s say your annual payroll equals $120,000.
You would divide $120,000 by 12. Your average monthly payroll is $10,000.
Take your average monthly payroll, $10,000, and multiply by 2.5.
This gives you a maximum loan ask of $25,000.

Example 2 – Some employees make more than $100,000

Now let’s say you have an annual payroll cost of $1,500,000.
You would subtract any compensation amounts that exceed annual salaries of $100,000. For this scenario, that amount will be $300,000.
You end up with $1,200,000.
Calculate your average monthly qualifying payroll. $1,200,000 divided by 12. Your average qualifying payroll is $100,000.
Take $100,000 and multiply it by 2.5.
Your maximum loan amount is $250,000.

Example 3 – You have an outstanding EIDL loan. No employees make more than $100,000

You have an annual payroll of $120,000.
That makes your average monthly payroll $10,000.
You’ll multiply 10,000 by 2.5. Generally that will give you a max. loan amount of $25,000.
But because you have a $10,000 EIDL loan, you’ll add that amount to the $25,000.
Your maximum loan is $35,000.

Important Dates

Banks can begin processing loan applications on April 3, 2020. You can apply for a Paycheck Protection Program loan through June 30, 2020. You have until June 30, 2020 to restore your full-time employment and salary levels for changes made between February 15,2 020 and April 26, 2020.

Loan Forgiveness

Here’s where we recommend you pay special attention. While these loan can be forgiven, you must meet certain criteria for the SBA to forgive the loan. If you do not, you will owe money. The loans must be paid back within two years. They have a one percent interest rate.

The Small Business Association will forgive the loan if:
  • employees remain on your payroll for eight weeks after the loan is made, AND
  • the money is used for payroll, rent, mortgage interest, or utilities, AND
  • 75% of amount to be forgiven was used for payroll.

These loans are meant to keep people employed, so loan forgiveness is based on you keeping and/or rehiring employees and maintaining their salary levels.

The SBA will reduce forgiveness if the number of full-time employees declines or if salaries and wages decrease. If you decrease salaries and wages by more than 25 percent for an employee who made less than $100,000 in 2019, your loan forgiveness will be reduced.



Economic Injury Disaster Loans

Another loan available to struggling small businesses is an Economic Injury Disaster Loan (EIDL). The CARES Act relief package sets aside $10 billion specifically for EIDLs. While the EIDLs program isn’t new, the CARES Act expands the low-interest loans to more businesses, and it loosens the application requirements.

In addition to traditional small businesses, the following types of businesses are eligible for an EIDL:
  • Sole proprietors
  • Independent contractors
  • Nonprofit organizations, including 501(c)(6)
  • Tribal businesses
  • Cooperatives
  • Employee Stock Ownership Plans (ESOP) with fewer than 500 employees
Eligibility criteria changes:
  • No personal guarantees for loans smaller than $200,000.
  • Loans can be approved based solely on an applicant’s credit score.
  • A previous bankruptcy does not make an applicant ineligible for a loan.
  • Borrowers can get a forgivable $10,000 emergency grant cash advance if the money is used for payroll, paid leave, mortgage or lease payments, costs associated with supply chain disruption, and repaying other unmet debts due to revenue losses

Small businesses can get an EIDL and a Paycheck Protection Program as long as the loans are not used to pay for the same expenses. Your lender will be able to provide you with more specifics. 

Tips to Help You Get Your Loan Forgiven

Yes, the SBA says your some or all of your PPP and EIDL loan will be forgiven if you use it for its intended purposes. However, loan forgiveness is not an automatic action by your lender or the SBA.

In addition to the strict guidelines you must follow, you must also request to have the loan forgiven. And you’ll have to submit information showing you’re eligible for loan forgiveness.

Aside from keeping your employees on the job and paying them (and following the other guidelines), the most important thing you can do to insure your loan is forgiven is to document, document, document.

You’ll have to substantiate how you used the loan money. For instance, if you used it to pay utilities or rent, hang on to those receipts of payment. This is the type of evidence you’ll have to provide to the lender to have the loan forgiven.

What if Loan Forgiveness is Rejected?

Hopefully your loan forgiveness request will be approved, but if it’s not you’ll be able to appeal. Currently, the SBA has not released specific appeal guidelines for either of these small business relief programs. You will be able to appeal. That process will likely start with an internal appeal at the bank, then go through the Small Business Administration. If forgiveness is still denied, you can take your appeal through the court system. We will update you with more information as it is provided.

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