What happens if your PPP loan isn't forgiven in full?

Editor’s note: Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation.

Through the Paycheck Protection Program (PPP), small business owners and other eligible organizations can apply for loans of approximately 2.5x their average qualified monthly payroll expenses, up to $10 million. These loans are intended to keep employees on the payroll and small businesses and other eligible organizations afloat amid the coronavirus.

PPP loans are not intended to put small business owners in debt. These loans may be forgivable, in whole or in part, if borrowers meet certain requirements. Among others, business owners must use at least 60% of the forgivable amount on eligible payroll costs during the loan forgiveness covered period. Additionally, no more than 40% of the forgivable amount can be used on other eligible non-payroll costs, including rent, mortgage interest, and utilities.

What reduces the loan forgiveness amount?

You may reduce your chances of loan forgiveness if you reduce employee headcount or employee salaries/wages during your loan forgiveness covered period.

Additionally, if you received an advance through the Economic Injury Disaster Loan (EIDL) program, it will be deducted from your forgivable amount. Funds that borrowers spend on ineligible costs may not be forgiven. Payments borrowers make to independent contractors using PPP funds are not eligible for forgiveness.

Only funds used during your loan forgiveness covered period are eligible for forgiveness. But there is some flexibility. Certain costs may be eligible for forgiveness if borrowers incurred them before the covered period but paid them during the period. Likewise, certain costs may be eligible for forgiveness if borrowers incurred them during the covered eight-week period but paid them after the period so long as the costs are paid on or before the next billing date.

What if my loan isn’t forgiven in full?

You will have to repay any amount of the PPP loan that is not forgiven at a 1% interest over a 5 year term. Loan payments will be deferred for six months but will start incurring interest immediately. PPP loans have no fees and no prepayment penalties.

Eligible business owners have up to six months to apply for forgiveness. Once you submit your application for forgiveness, the lender will have 60 days to accept or deny your application.

The loan forgiveness application is complex. Consult an accountant or financial advisor and work with your lender to ensure the accuracy of your application. Carefully tracking your spending and organizing payroll during your loan forgiveness covered period may ease the application process.

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Regulations and guidance from the Small Business Administration and the U.S. Department of the Treasury on the PPP are evolving rapidly and the information in this article may be outdated. Please refer to the latest guidance from the SBA and the Treasury to confirm current program rules.

The resources described above are made available to businesses within the United States of America.