When should I apply for PPP loan forgiveness?

The question is on many small business owners’ minds. Rules for the PPP have changed frequently since its inception, so planning has been a moving target. A smart approach to applying for forgiveness will take advantage of this uncertainty to maximize your business’ benefit. Ultimately, the right approach to forgiveness will depend on your business, so here are some guidelines to follow.

Most businesses should wait until January 2021 to apply for PPP forgiveness.

There are several complex formulas and rules around PPP loan forgiveness – but two safe harbor (read: business-friendly) rules kick in on 12/31/2020. One revolves around rehiring FTE headcount, the other around restoring wages and salaries. There are several small businesses who may benefit from these safe harbor provisions. Examples include:

    • You laid off, furloughed, or reduced hours on your staff.
    • You performed across-the-board wage cuts to your organization, or targeted wage cuts to individuals.
    • If you have commissioned sales force that are currently receiving low compensation vs. last year.
    • Your staff receives and reports tips, which are quite a bit lower now (e.g. because of 50% capacity requirements.)
    • You have not maintained robust documentation on employees fired for cause (which the government may consider layoffs.)
    • Your company may be facing bankruptcy or liquidation.

In any of these scenarios you will benefit by waiting until 1/1/2021 to apply for PPP loan forgiveness. This also gives you the benefit of any future program changes congress may pass – which have typically been to the benefit of business owners. Keep in mind you will not have to make debt payments until October 2021, so there’s a 10-month window in 2021 to apply before making loan payments – plenty of time.

Some businesses should apply for PPP forgiveness now.

There is a very narrow subset of small businesses that would benefit from applying for PPP loan forgiveness as soon as possible. This would specifically be small businesses who did not reduce headcount or wages during Covid-19, but may need to do so in the near future. For these small business owners, it is simpler to elect an 8-week forgiveness period and apply using the EZ form, which avoids complex FTE and wage formulas. Waiting for the full 24 week period may result in lower forgiveness if they end up performing a reduction in force or wage cuts. 

Keep in mind most banks haven’t even built out their forgiveness applications yet. Although the SBA has released a forgiveness application template, banks plan to have their borrowers apply for PPP forgiveness via web portals. If you want to apply sooner, you will need to request an exception from your banker.

Every small business should build a PPP forgiveness forecast.

No matter your situation, you should build a forgiveness forecast now to help you understand your best options and maximize your forgiveness. To build a forgiveness forecast, follow the instructions provided in the SBA forgiveness application using estimates for your company’s 8-week or 24-week forgiveness period. Have a financial professional double-check your work to ensure you’ve considered all the details.

Once you have built a PPP forgiveness forecast, use it as a tool to answer the following questions:

    • Should I use the 8-week or 24-week forgiveness period?
    • Should I apply for forgiveness now, or after 12/31/2020?
    • Can I improve my loan forgiveness by:
      • Converting 1099 contractors to w-2 employees?
      • Shifting sales commission structure more heavily towards salary with targets?
      • Investing in discretionary projects like R&D, website rebuilds, or operations efficiency projects?
    • If needed, can I perform a reduction in force without affecting my PPP loan forgiveness?
      • What would be the proper timing of a RIF?
      • Are there Table 2 employees that can have wages reduced without affecting forgiveness?
      • Can I perform a furlough and recover staff by 12/31/2020 to achieve full forgiveness?

PPP funding does not replace financial strategy.

Remember: there’s no sense in bending your business upside down to achieve full forgiveness. Any PPP strategy should be consistent with your overall business financial strategy.

Want to talk about the PPP more? Contact us here for your free consultation.

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