Addressing PPP Forgiveness Questions

business man touching red question mark
Jim Devine Photo

3 minutes

Economic stimulus plan is demanding lenders’ staff time and may not ultimately succeed in keeping small businesses afloat.

There is obviously a lot of confusion regarding the forgiveness issue for the U.S. Small Business Administration’s Paycheck Protection Program loans. The ultimate fallout of this is the significant non-productive time requirements lenders are going to have to devote to address the wide range of confused and frustrated questions they will be asked by the borrowers.

There are now three different forgiveness applications:

  1. Standard form
  2. EZ form
  3. EZ form for loans under $50,000

Borrowers are confused about the supporting documentation requirements and are calling their lenders for clarification. If the borrowers choose not to file a forgiveness application and they don’t sign any related loan documents, the lender will have to file a claim with the SBA. Again, this is a very staff-time-consuming and therefore expensive exercise to manage. Lenders will have to pursue the SBA claim because there will not be any other recourse.

Payments are now due on many of these loans. The SBA has given lenders little if any direction on specifically what to do to properly process forgiveness applications. The original period for measuring loan proceeds usage was eight weeks from the receipt of the funds, which was pushed out to 24 weeks. If the first repayment due date is pushed out to sometime several months beyond the 24-week eligibility period, all the related paperwork documenting the loan repayment process will need to be reviewed and modified accordingly. Again, this is costly administrative time that will need to be spent by the lenders.

Making matters more confusing, Economic Injury Disaster loans were initially referred to as a grant by the SBA. Because of this, EID program applicants assumed they would not have to repay these funds. At the start, this program was separate from PPP. Now the guidance from the SBA is linking EIDL grants to the PPP forgiveness analysis. If you have to reduce the PPP forgiveness amount by the amount of the EIDL grant, you have effectively turned the grant into a loan.

What is unfortunate is that many PPP loans were apparently made to businesses that should not have been eligible in the first place. Combining that with the logic of a government stimulus program that was perceived from the beginning to be funding provided that would be substantially if not totally forgiven, has put a lot of hindsight political pressure on the SBA and, in turn, on lenders that granted PPP loans. 

I have been told that some lenders have created a demand note with a full repayment date set out at three to five years from now. Since no formal underwriting was required for these PPP loans, which were designed as a stimulus program, how many of these businesses will still be in place and capable of repaying a few years from now? 

Much talk was heard over the last couple of months that SBA, with the blessing of Congress and the U.S. Treasury Department, would blanket forgive all “small loans” under $150,000 or maybe under $50,000, but nothing has happened to confirm that reality. With the election around the corner, it is unlikely that this kind of blanket relief will become reality.

Maybe an early holiday gift will come down for the lenders that will in fact, grant 100% forgiveness to all loans under $150,000. I hope that is what plays out, but I am not holding my breath. It is a scary thought to think how many of the small businesses that received these PPP loans will likely not survive given the impact the pandemic has had on the general economy. 

Jim Devine is CEO of Hipereon Inc., Kirkland, Washington, and a faculty member for CUES School of Business Lending™.

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