Over the past few weeks, we’ve been fielding questions from many of you about Paycheck Protection Program eligibility, closing and funding. Now that Round 2 of the funding phase is well underway, many of you are turning your focus to the next phase: Forgiveness. As we saw with the origination side, there is little guidance to assist us with borrower questions that are coming up now or in preparing for the 8-week mark that’s just around the corner. So we’re back to my favorite, “In Absence of Guidance…”  How do lenders and borrowers prepare?

Forgiveness. Let’s start with the easy part: the 25% of the loan amount allowed for rent, utilities, interest payments on an existing or existing business debt, and health insurance premiums. As with all things SBA, it’s important – in fact critical – to document these expenses. Recommendations include copies of your borrowers’ cancelled checks and/or wires for these payments along with the corresponding bills, invoices or leases. Sounds simple. So now we wait for guidance to see if SBA throws us any curveballs.

Rehiring: the 75% of the loan allowed for rehiring employees. This will be the tricky part. What’s the definition of rehire?  Will 1099 salaries count?  The list goes on and on and on. We’re already tackling questions like these:

  • My employees will not come back to work because they’re making more from unemployment insurance. Can I hire new people? And will the new payroll count under the PPP since the new employees are replacements, not rehires?
  • As the business owner, I was on a 1099 salary before the loan but now I want to take a W-2 paycheck. Can I do that?  Will it count toward forgiveness?

I’d like to say that we have all the answers but we don’t yet. The FAQ issued jointly by the U.S. Treasury Department and SBA on May 3, 2020 has some thoughts addressing these questions:

  • Employers should attempt to rehire employees in writing, e.g., email, and require responses in writing. They must hold onto/file employees’ responses if they decline. Then they should hire people to fill the positions, and document their good faith efforts to rehire and use the money for the intended purposes: Employee salaries. Question #40 from the FAQ issued by Treasury/SBA further supports the written offer of rehire and adds that more guidance is coming.
  • Borrowers changing up how they and/or employees are paid for the benefit of forgiveness may not sit well with SBA. However, again in absence of guidance that is a hard call to make.

Overall, we believe that if borrowers and lenders do their best to adhere to the rules we know about for certain, document their files, and act in good faith to use the funds for the intended purposes, forgiveness shouldn’t be hard to navigate.

As we get clearer guidance, we will share it with you. Until then, stay safe and stay positive.

Rebecca Mendoza
Senior Associate