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Critical Timing Issues for PPP Loans - Apply ASAP or Wait?

Updated April 9, 2020

In a post published on April 2, 2020 we communicated a concern related to timing issues of the PPP loan.  The big unknown at the time was the SBA’s interpretation of the CARES Act “origination date” and the impact it would ultimately have on the loan forgiveness period.

To recap, the CARES Act states the borrower has an eight-week window, which begins on the loan’s origination date, to spend the borrowed funds on approved expenses for loan forgiveness. Note there are other factors for full loan forgiveness, we are focusing solely on timing issues in this post.

The definition of “origination date” was not spelled out in the Act’s language. That ambiguity led to varying interpretations. The Treasury clarified that “the eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower.”  Furthermore, the guidance also states that “the lender must make the first disbursement…no later than ten calendar days from the date of loan approval.

This clarification is particularly important to businesses that are currently closed and have laid off employees.  They would prefer to get loan approval but defer the loan to align with the re-opening date, when they can bring employees back to work. Those business owners will have to weigh the risk of “perfect timing” versus the possibility of money appropriated for the PPP program ($349 billion) drying up.

President Trump has requested more funding for the PPP loan program, but any additional funding will have to be approved by Congress. Vice President Pence tweeted on Tuesday that $71B has already been disbursed. Some news outlets are estimating that current funding may run out as soon as next Friday. The truth is that no one knows when the PPP money will run out or if there will be additional funding in the coming weeks. The other factor is how quickly your bank will process and approve your application. Business owners will need to make a decision on when to apply for the loan with these unknowns.

In all cases, you should work with your bank to understand the timing of your PPP loan disbursement once your loan is approved, relative to the ten days allowed by the Treasury.

Please reach out to us if we can be of assistance during this difficult time.  As we like to say at Beaird Harris, “It’s what we do together that sets us apart!”  Now, more than ever, it rings true.

April 2, 2020

We are all excited about the Paycheck Protection Program (“PPP”), a.k.a., 7(a) Loan Program; however, there is an important timing issue that every business owner will need to consider before applying for the loan.  

  1. Apply for the loan now, with the potential risk that it will not be forgiven in full?; OR
  2. Wait to apply until you are sure you can time the loan to maximize loan forgiveness?  The risk here is if total PPP funds dry up, you may miss out on this funding source.

Please review this information carefully to determine what is best for your business.  We have not seen any definitive guidance from the Small Business Administration (“SBA”) on this issue.  This is a fluid situation and we will continue to share information as we get it. In all cases, this is something that should be discussed with your bank before you apply for the PPP loan.

The CARES Act includes language that in order to receive the loan forgiveness, the loan proceeds must be spent on qualifying expenses within the eight weeks that follow the loan origination.

What is the loan origination date?  

  • The date you are approved for the loan?
  • The date the funds are disbursed?
  • Will you have any flexibility to direct when the loan is funded, which may be when the eight week clock starts?

This is a concern if your business has not returned to full employment as of the origination date.   In theory, you would want the eight week clock to start when you are open for “regular” business and paying maximum payroll; this would maximize your loan forgiveness amount.

On the flip side, many are concerned that if you don’t apply for the funds soon, they won’t be available later.

We have talked to a number of banks about this issue and no one has 100% clarity on the definition of origination date.  Some banks are saying they will offer the option of closing in 30 days or closing in May or June, which would allow you to apply now, get approved, then draw the funds at the most strategic time for your business.  Other banks do not have any guidance on this issue.  It is critical you get clarity on this issue with your bank prior to applying.  

This may be a non-issue depending on the final guidelines from the SBA. It is possible, however, that we may not know the definition with certainty before April 3, 2020. In which case, you may have to decide when to apply without knowing how it will be interpreted later.

Please keep us posted as you are working through this process.  This is about as fluid as it gets in getting good data to help in your decision making. We will continue to provide you with the best information we can to help you through this trying process.  Included below is an example to illustrate the timing issue.

To illustrate this concept, here is a simplified example.

Assumptions

  • “Normal” average payroll at full operations, $10,000 per month (based on 2019 payroll)
  • Maximum loan amount based on average payroll $10,000 x 2.5 = $25,000
  • April – reduced payroll due to limited staffing $7,000
  • May- open for “regular” business and payroll back at full force, $10,000
  • Rent and utilities for April and May (eight week period), $8,000
  • Loan originates April 1st, but due to shelter in place orders, you are still at reduced staffing for all of April.

Qualified expenses during the eight week period, after loan origination:

  • April payroll, $7,000
  • May payroll, $10,000
  • April and May rent and utilities, $8,000
  • Total expenses, $25,000

Sample loan forgiveness calculation:

  • Total loan proceeds spent on qualifying expenses?  YES
  • Assume all other tests are met related to the number of full-time employees – not detailed here.
  • However, one of the conditions for forgiveness of the loan is that payroll expenditures  are at least 75% of the loan amount.
    • 75% x $25,000 = $18,750 must be spent on payroll
    • Actual payroll for 8 weeks from loan origination, $17,000
    • Amount of loan that will need to be repaid is $1,750, even though the full $25,000 was spent on qualified expenses.

Conclusion

In this example, in order to maximize the loan forgiveness, it would have been better for this business to hold off on taking the loan until May, when full payroll resumes.

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