Published in Small Business

SBA turns focus to PPP loan forgiveness

BY Monday, May 25, 2020 02:41pm

After approving more loans in six weeks than during the prior nearly 60 years combined, the U.S. Small Business Administration now looks to provide debt forgiveness to borrowers.

Under the SBA’s Paycheck Protection Program, small businesses can earn forgiveness if they spend 75 percent of their loan amount on payroll expenses within an eight-week period. Borrowers with a PPP loan can now begin preparing to apply for forgiveness under initial guidance the U.S. Department of Treasury issued May 15.

“We’re just trying to hone in our forgiveness so that small business owners and lenders have what they need when it comes to complying with the forgiveness of this debt that essentially the lenders have on their books,” said Rob Scott, Great Lakes regional administrator for the SBA. “The prospect of debt these borrowers have, we want to make sure that it is truly forgiven and that it is complied with so we don’t saddle small business owners with more debt to hurt them down the road.”

The 11-page document provides instructions, definitions and forms to calculate full-time equivalent employees, what percentage of the SBA-backed loan proceeds a borrower applied to payroll expenses, and what went to other qualified business expenses. Borrowers may use up to 25 percent of their PPP loan for business expenses such as utilities, rent, debt incurred before Feb. 15, internet and cell phone service, and transportation.

Those threshold requirements for spending PPP money could change, Scott said.

The SBA awaits action in Congress that would double the compliance period to use PPP loan proceeds from eight to 16 weeks, Scott said. Some lenders “are a little wary, essentially, to do a loan right now” under the PPP because they worry whether the borrower can fully comply and make the loan fully forgivable, Scott said.

That change would “certainly renew interest in the PPP” after massive demand in the early weeks, he said.

Questions remain

The present eight-week period written into the federal CARES Act that created the PPP has been one of the “big questions on everyone’s minds,” as is the potential for Congress to change the requirement for borrowers to use 75 percent of the money for payroll expenses, said Mike Tierney, CEO of the Community Bankers of Michigan.

“Will they extend the eight-week payroll period as many businesses are still forced to remain closed or operating at less than full capacity and will they lower the 75 percent payroll requirement for the use of the funds?” Tierney said in an email to MiBiz. “That would give business owners a lot more flexibility in how they use the funds.”

The SBA wants to maximize how many PPP borrowers can qualify for partial or full loan forgiveness, Scott said.

If a PPP borrower is unable to put 75 percent of the money toward payroll, it could still qualify for partial loan forgiveness, he said. Small businesses would then have two years to pay back the unforgiven amount to their lender at a 1 percent interest rate. They would have to start repayment within six months from the date of dispersal.

“It’s not an all or nothing proposition. It would be scalable,” Scott said. “What we’re planning on is a vast majority of these loans will be forgiven with some of them being paid back.

Frontloading benefits

One potential way for a business to help meet the 75 percent threshold to get full forgiveness is to frontload expenses such as contributions to employees’ 401(k) retirement plans, according to Chris Middleton, executive vice president and director of the retirement plan division at Greenleaf Trust in Kalamazoo.

Department of the Treasury and SBA guidelines do not preclude frontloading the cost of benefits, Middleton said. He’s been receiving calls from clients who own small businesses, received a PPP loan and are now asking for advice on getting maximum loan forgiveness. Many intend to use employee retirement accounts to get PPP forgiveness.

“We have a good percentage of them that are doing this or pursuing doing it,” Middleton said. “Since there was no limit put on how much can be put into employer contributions, many employers are saying, ‘I’m planning on putting the entire employer contribution for the full year into this bucket.’”

However, Internal Revenue Service guidelines issued a month ago prevent employers from deducting those expenses on their federal tax return if they use PPP money for the contribution, Scott said. Since federal money paid those expenses, getting a tax deduction “would be double-dipping,” although Congress could change that as well, he said.

Taking action

Congress created the PPP through the CARES Act and initially allocated $349 billion to the SBA for small business relief loans. The SBA went through the first funding round in just two weeks, leading Congress to appropriate another $310 billion. The PPP resumed April 27 and as of last week still had $100 billion available, Scott said.

Since launching the PPP in April through nearly 5,500 banks, credit unions and other lenders nationwide, the SBA has approved and backed more than $513.2 billion in loans for more than 4.3 million small businesses as of May 16. In Michigan, nearly 112,000 small businesses received PPP loans totaling $15.7 billion.

The loans approved nationwide under the PPP exceed all of the lending the SBA had done since its formation in 1953, Scott said.

“We did more loans in six weeks than we’ve ever done, total, as an agency,” he said.

The federal loans were meant to pay small businesses to keep employees on the payroll or call them back to work if they were laid off after many states issued stay-home orders. Those orders and the economic fallout from the COVID-19 pandemic hit small businesses hard.

In an April survey by the Small Business Association of Michigan, one in seven respondents said they did not expect their business to survive the crisis.

Economists at the University of Michigan estimate that nearly 5 percent of employees in Michigan worked at businesses prior to the pandemic that are now expected to fail, according to a recent outlook presented to state legislators.

State outlook

After a deep second quarter decline, University of Michigan economists predict the state’s economy will partly recover in the latter half of the year to post Real GDP growth of 1.7 percent for all of 2020, and 1 percent in 2021.

“This is a very challenging time for Michigan’s economy and families. There’s a great deal of uncertainty about the economic outlook, and much of that uncertainty stems from the uncertain path of the COVID-19 pandemic,” University of Michigan economist Gabriel Ehrlich told state lawmakers earlier this month.

However, the outlook assumes that the pandemic will not have a “major second wave” later in 2020 that delivers another blow to the state’s economy.

“We are not forecasting a major second wave of the pandemic that would cause the same sort of economic disruption and shutdown that we’ve seen in the first wave,” Ehrlich said.

In an updated outlook, Comerica Inc. economists project a 32.8-percent decline in state Real GDP for Michigan in the April-to-June period, led by the manufacturing sector that was largely shut down for weeks and is just now beginning to reopen. The outlook estimates state Real GDP began to dip in the first quarter with a 4.3-percent decrease.

Comerica projects a rebound of 12.6 percent in the third quarter. Real GDP for Michigan would then dip 2 percent in the fourth quarter, before returning to growth in 2021.

U.S. outlook

Nationally, Comerica Inc. projects a “W-shaped pattern” for U.S. economic performance. The Comerica outlook projects a 28.3-percent decline in Real GDP in the U.S. for the second quarter, followed by 12.1-percent growth in the third quarter and a modest 2.6-percent decline in the final three months of 2020 “as the pandemic reasserts itself and social mitigation policies are strengthened,” according to Comerica.

The University of Michigan’s latest outlook for the U.S. calls for an overall 4-percent decline in Real GDP for all of 2020, with a 30-percent decline in the second quarter alone. The national economy would then see a “significant rebound in the third quarter as a lot of restrictions on businesses are relaxed,” U.S. Forecast Specialist Daniil Manaenkov said during the legislature’s May 15 revenue estimating conference. The U.S. economy should rebound with 3.3 percent Real GDP growth in 2021 and 2.1-percent growth in 2022, according to the university.

As with the state forecast, University of Michigan economists wrote in their U.S. outlook that they were “optimistic that a dramatic second wave of new cases can be avoided, and that schools will reopen in person in the fall. We predict social distancing to continue over the next several quarters, stemming largely from private sector caution rather than government mandates.”

More SBA tools

Given the down economy, the SBA now looks to push a traditional small business lending program known as 7(a) Express, which offers loans of up to $350,000. The CARES Act increased that amount to $1 million, Scott said. Congress may raise the federal guarantee for 7(a) from 50 percent to make it more attractive to lenders, he said.

Following the 2008 financial crisis, Congress raised the federal guarantee on 7(a) loans to 90 percent. An SBA 7(a) loan could provide a source of capital for small businesses during the economic downturn brought on by the pandemic, Scott said.

“This is going to be a long-term effort. It isn’t going to be these states opening up and the flip of a switch and everything goes back to pre-COVID. This is going to be months of recovery, if not years,” he said. “We’re going to be here for a long time and engaged in all communities.”

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