In terms of the SBA's Paycheck Protection Program (PPP/), which bailed out thousands of small businesses during the peak of the pandemic earlier this year, the forgiveness process is currently underway. That said, there is still some confusion regarding exactly how this is unfolding and what borrowers can do right now to ensure that their funds are forgiven at least in part if not all. In this article, we will look at the SBA loan forgiveness process and spotlight some potential issues that could arise if borrowers are not proactive in applying for PPP forgiveness.
Understanding the SBA's PPP Forgiveness Policy
Through the CARES ACT, Congress authorized a provision to the SBA loan 7(a/) in which borrowers could seek forgiveness if they met certain criteria. In some cases, borrowers could apply for forgiveness for the entire amount. In conjunction with the PPP, the SBA issued a series of guidelines and regulations that had to be followed for borrowers to in fact qualify to have their loan forgiven. Among such provisions, a borrower has to be deemed an eligible recipient of funds. They also were required to use the funds as outlined by the SBA.
Once the loan has reached its maturity date, the borrower can then start the forgiveness process. If the applicant has used all funds before the end of the covered period, they are also allowed to go ahead and start a forgiveness review. There are two different maturity dates. For those borrowers who received funding before June 5, 2020, they originally had eight weeks during which to utilize PPP funds. For those applying after June 5, that window of time was extended to 24 weeks. This was then later amended, and those who received money before June 5 did have an option to use the 24 weeks instead.
With both scenarios, a borrower had to use the funds within the time allotted to qualify for any sort of forgiveness. The borrower then has ten months to apply for forgiveness from the end of the covered period. If they fail to do so within ten months, or if for whatever reason the SBA deems them ineligible for forgiveness, they will have to start paying back the loan.
The Lender and the SBA Forgiveness Process
The lender plays a fairly important role in facilitating the forgiveness process. The borrower will submit the forgiveness application to the lender. At this point, the lender must then confirm receipt of all necessary borrower certifications, check on the calculations needed, and confirm receipt of all required documentation, particularly that which pertains to payroll expenses.
Once the lender does receive all of the information required for the SBA forgiveness application, they then need to carefully review and ensure that the amounts spent to qualify the borrower forgiveness. Lenders do tend to work with the borrower if something seems off. This way the borrower has the best chance of being approved by the SBA once it does get to that stage of the review. There could be errors in calculations or missing documents, for example. The sooner these are pinpointed and rectified, the better.
After reviewing everything, the lender is then required to issue a decision to the SBA regarding forgiveness. The lender has approximately sixty days to do this upon receiving the completed application packet. The decision can either be an approval, a denial, or denial without prejudice if the SBA is in the process of conducting a review. If the SBA informs the lender that they are conducting a review of a forgiveness application, the lender has to hold off on issuing any form of approval.
Those borrowers who receive a denial without prejudice can appeal the decision and ask that the lender reconsider. If the borrower does get approval and consequently is eligible for forgiveness, the lender then will go to the SBA and request payment.
In the event of a denial, the lender has to provide a reason to the SBA for this decision and provide the necessary documentation to back up their decision. They must also notify the borrower in writing. The SBA can review any decision of this nature at its discretion. A borrower can also then request that the SBA review the decision independent of the lender. If the SBA then agrees to review, they will notify the borrower and the lender and accordingly let them know their decision once it is reached.
SBA PPP Review
As the SBA sees fit, they can review any PPP loan forgiveness application. They will be looking at the following:
- Borrower Eligibility: Under the CARES ACT, was the borrower eligible for PPP money at the time of funding.
- Use of Proceeds: This also will factor in the original loan amount and whether or not the borrower calculated the amounts correctly. Furthermore, did the borrower use the money in terms of acceptable uses.
- Loan Forgiveness: To get forgiveness, the borrower had to have used the funds as specified by the SBA guidelines and their stated amounts on the original loan application.
If the SBA notes a red flag in submitted documentation, they can opt to conduct a review. If anything is suggesting a borrower is ineligible for SBA forgiveness, the SBA will most likely decide to review the application. The borrower needs to keep all relevant PPP loan documentation on file for six years after the loan is forgiven and must give access to the SBA should they request such documentation down the road.
The forgiveness process can seem daunting at first glance. This is why borrowers need to familiarize themselves with the documentation required and the steps that need to be taken both with the lender and the SBA. The better prepared you are upon applying, the better your chances of receiving forgiveness for all or part of the loan.
First Union Lending has been working with countless small business owners during this difficult time. We've helped many navigate the PPP process. We want to see our clients make it through this and ultimately succeed. If you need additional working capital, call today—we may have the perfect solution for you!