When to Apply for PPP Loan Forgiveness
Published October 2, 2020
Updated October 5, 2020
PPP Loan Forgiveness Has Started – When Should You Apply? Most of us are approaching the end of our 24-week covered period and starting to think about applying for the loan forgiveness. Technically, there’s no rush. The deadline for submitting applications to our lenders is ten months from the end of our covered periods, which puts us into the summer of 2021. If you miss that deadline, then the PPP loan is not forgivable and becomes a real loan.
With the following recent law changes, 100% of our PPP loans ought to be forgivable (even with some limits on owner compensation and the inability to include rent in a self-rental situation):
- Extension of the covered period from 8 to 24 weeks;
- Dropping the percentage of PPP loan proceeds that had to be spent on payroll costs from 75% to 60%; and
- Adding broad new safe harbors that effectively eliminate the possibility of a pro-rated reduction in loan forgiveness due to lower FTE headcounts and pay reductions for lower paid employees,
Banks are rolling out their forgiveness applications, and about 100,000 businesses have applied. The banks review and approve the applications and submit them to the SBA for a final sign-off. As of October 1, the SBA has approved exactly zero of them, frustrating borrowers and lenders alike.
We would be moving forward with our forgiveness application if:
- Our PPP loan is over $150,000; or
- We are in the process of selling our practice.
The possibility remains that loans under $150,000 will be granted blanket forgiveness, and we’d be holding out for that since it will save hours of document preparation. Larger loans probably won’t get a blanket exemption, so we would start completing our bank’s forgiveness application and assembling the required documentation.
When it comes to a practice sale, the PPP loan is a complication. Since the forgiveness process may take up to five months, you want to submit the application as soon as possible. It would be ideal if the SBA can forgive the loan before the closing date, but that just may not be feasible.
But, if the practice sale is to take place before PPP forgiveness can be obtained, your loan agreement may require your lender or the SBA consents to the sale transaction. If you sell the practice without getting this, then the forgiveness is put at risk and you may have committed a PPP loan default. This could trigger a payment penalty and immediate loan repayment. Basically, this has the potential to be a real mess.
SBA PROCEDURAL NOTICE 5000-20057
Congress never intended for the CARES Act to interfere with the normal buying and selling of businesses. This potential snafu is just one of the unintended consequences that comes with implementing a sweeping new lending program like PPP. In response to this major potential problem, on October 2nd the SBA issued Procedural Notice No. 5000-20057. This Notice provides a framework for PPP borrowers to sell their businesses (or part of them) and still qualify for PPP loan forgiveness.
The Notice states that, “Prior to the closing of any change of ownership transaction, the PPP borrower must notify the PPP Lender in writing of the contemplated transaction and provide the PPP Lender with a copy of the proposed agreements or other documents that would effectuate the transaction.” A “change of ownership” includes (1) the sale of at least 20% of the company’s ownership interests (e.g., shares of stock or LLC units), (2) the sale of at least 50% of the PPP borrower’s assets, or (3) the PPP Borrower is merged with another entity.
The Notice confirms that there are no restrictions on a change of ownership if the PPP loan has already been paid off. But, that’s rarely going to be the case. PPP borrowers want to get full loan forgiveness and don’t want to have to pay the loan off.
The Notice then offers exemptions from SBA pre-approval for the different types of change of ownership transactions. If your contemplated transaction is going to be one of the following, then you will have to follow the following procedures
- Sale of 50% or less of the PPP borrower’s stock or other ownership interest: No SBA consent required. (If the sale is at least 20%, then the PPP lender must still be notified and provided with copies of the transaction documents – and depending on your PPP loan agreement with your bank, bank consent may still be required. If the sale percentage is below 20%, then none of this is required).
- Sale of more than 50% of the PPP borrower’s stock or other ownership interest: SBA approval is not required if the PPP borrower completes a forgiveness application and sets up an escrow account with the PPP lender which is funded with enough money to repay the PPP loan. If the PPP loan is ultimately forgiven, then escrow money is returned to the borrower.
- Sale of less than 50% of the PPP borrower’s assets: This is not a change of ownership situation and does not require SBA approval. It probably does not require your lender’s consent either, but review your PPP loan agreement to be sure.
- Sale of 50% or more of the PPP borrower’s assets: SBA approval is not required where the company is selling 50% or more of its assets if the PPP borrower completes a forgiveness application and sets up an escrow account with the PPP lender which is funded with enough money to repay the PPP loan. If the PPP loan is ultimately forgiven, then escrow money is returned to the borrower. (Even though no SBA approval is required, as with 20% - 50% stock sales, lender approval is likely still required).
- Merger of the PPP borrower into another company: This is very unusual in professional practice transitions, but if you are merging your practice into another company and yours is going out of existence, then you can again avoid needing SBA approval if you compete a forgiveness application and set up an escrow account.
Unless these exceptions are met, then SBA approval is going to be required. The lender submits information to the SBA and the SBA may require the borrower to take additional risk mitigation measures. Basically, that will be a time-consuming nightmare which could delay the practice sale. It should be avoided at all costs. The escrow account is a good alternative. The best solution would be for Congress to get its act together and grant automatic loan forgiveness for most of the outstanding PPP loans.
Collier & Associates, Inc. will update our blog as the CARES Act progresses. We take pride in continuing to keep our subscribers and website visitors updated on current events during this extraordinary time.
We will work diligently to answer general inquiries via our website if time permits and in a little more detail within our Newsletters. However, if your questions are detailed in nature, please request to set up a conference call for a formal consultation. Thank you.
Collier & Associates, Inc. provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act on this information without seeking advice from professional advisors.
Talk to Collier & Associates Today