Businesses that received a federal Paycheck Protection Program loan and are growing or intend to seek financing for an expansion should apply for loan forgiveness as soon as possible, according to bankers.
While a vast majority of borrowers with an outstanding PPP loan are expected to eventually secure forgiveness from the U.S. Small Business Administration, debt from the federal aid program that remains on the books will be considered when seeking growth capital.
“We will look at that as a debt obligation until such time it is fully forgiven,” said Eric Mills, senior vice president and business banking regional executive for Fifth Third Bank in West Michigan.
“It would be calculated on a case-by-case basis,” Mills added. “Obviously, from our perspective, we are highly encouraging our customers to apply for forgiveness. That would provide a solution so they would not have that additional debt included in our analysis as they wish to start to grow their company again.”
However, a company’s outstanding PPP loan is “a consideration, not necessarily a hindrance” when seeking financing from Fifth Third, said Michael Shepherd, senior vice president and national SBA director for the Cincinnati, Ohio-based bank.
Mills urges small businesses that need capital to support growth to apply, even if a PPP loan is still on the company’s books.
Most loans forgiven
In response to the COVID-19 pandemic, the SBA approved 11.4 million PPP loans nationwide totaling $791.3 billion across two rounds in 2020 and 2021.
In Michigan, more than 128,000 small businesses received a combined $16 billion in PPP loans between the two rounds.
Small businesses that used the money for qualified expenses can apply and receive full or partial forgiveness of their PPP debt. The SBA as of July 30 had forgiven more than 4.8 million PPP loans totaling $441.8 billion.
PPP borrowers first file a forgiveness application with the bank that originated their loan. The bank then reviews and submits it to the SBA for a decision.
The bank has 60 days to review and submit the forgiveness application, and the SBA has another 90 days to make a decision. Most decisions are made in 30 days or less, according to Fifth Third’s Jacob Brown, director of the bank’s SBA national operations.
The SBA has so far approved a large majority of forgiveness requests. An expedited application process for loans up to $150,000 is “incredibly simple,” Shepherd said.
The SBA on Aug. 4 opened an online portal for small businesses with PPP loans of up to $150,000 to apply directly to the agency for forgiveness. Banks that participated in PPP can opt to use the portal if they do not have one of their own.
Seeking new credit
As the economy continues to recover from the deep dive more than a year ago, bankers are now seeing small businesses that got a PPP loan coming for new credit to support growth or for additional working capital.
“The economy’s doing well, (companies) are growing and people are investing a lot in their business in terms of automation because there is a labor shortage,” said Sean Welsh, regional president in Grand Rapids for PNC Bank.
The biggest challenge right now is the SBA working through a backlog of applications, he said.
Since banks vet PPP borrowers’ forgiveness applications before submitting them to the SBA, borrowers should know whether they meet federal criteria and have a good idea of whether the debt will get forgiven, Welsh said.
For companies with an outstanding PPP loan that are now seeking new credit, “we should have a good idea whether it’s going to be forgiven and then take that into consideration as we go forward,” Welsh said.
At Horizon Bank, new business loan applications from small business clients with outstanding PPP debt get treated “kind of (as) business as usual,” with the presumption that a company awaiting an answer from the SBA will get forgiveness, said Regional President David Quade.
“We understand the program and we understand where they are in the forgiveness process, and we just kind of take the big-picture approach that this is going to be forgiven,” Quade said. “That’s what’s been happening, that’s the intent, and that’s the notion you need to work under.”
That approach may prove different for small businesses that switch banks, Quade said. He advises small businesses that are considering a move to another bank to wait until their outstanding PPP loan is forgiven by the SBA.
First National Bank of Michigan in Kalamazoo looks at new credit requests from small businesses with an outstanding PPP loan similarly and with the presumption that it will eventually receive forgiveness.
“It just needs an explanation. That’s it,” said First National Bank President and CEO Dan Bitzer.
Overall, bankers are seeing strong loan demand as the economy improves, although many borrowers with strong balance sheets are opting to use cash first to finance an expansion or capital purchase before taking on new debt.
“There’s so much liquidity and cash out there that people are paying debt off or doing things with cash,” Quade said.