The Latest PPP Update

October 9, 2020 | Article

The government released several important updates to the Paycheck Protection Program (PPP) during this last week.

PPP Loans of $50,000 or Less
The government introduced a new forgiveness application for certain borrowers with PPP loans of $50,000 or less. This new application is referred to as the Alternative Loan Forgiveness Application (SBA Form 3508S). The government states that a borrower using the SBA Form 3508S (or the lender’s equivalent form) is “exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent (FTE) employees … or reductions in employee salary or wages.”

All borrowers with PPP loans of $50,000 or less are eligible to use this new application, “other than any borrower that together with its affiliates received loans totaling $2 million or greater.”

The government also introduced new rules for lenders reviewing the new Alternative Loan Forgiveness Application. These lenders only need to confirm receipt of the borrower’s necessary certifications and documentation.

This is a welcome development for eligible borrowers with PPP loans of $50,000 or less and may result in eligible borrowers with enough qualified expenditures achieving full forgiveness without requiring the borrower to undertake complex FTE and salary computations. However, all other borrowers are still subject to the FTE and salary reduction rules.

Qualified Expenditures Exceeding a PPP Loan
We have previously highlighted that current PPP guidance apparently allows a borrower to incur eligible expenditures in excess of the borrower’s loan. The government recognized this possibility in a new interim final rule, stating “[i]n some cases, a borrower may submit to a lender documentation of eligible payroll and nonpayroll costs that exceed the amount of the borrower’s PPP loan.”

This means that borrowers subject to forgiveness reductions on account of FTE or salary cuts may still be able to achieve full forgiveness because their eligible expenditures exceed their loan. For instance, if a borrower incurs a $100,000 PPP loan and pays $150,000 of eligible expenditures during its covered period, the borrower could achieve full forgiveness even if the borrower’s forgiveness is reduced by $50,000 because of FTE or salary reductions. However, a borrower can never generate a forgiveness amount in excess of any outstanding PPP principal plus accrued interest.

For borrowers submitting eligible expenditures exceeding their PPP loan amount, the government states the lender only needs to “confirm receipt of the documentation the borrower is required to submit to aid in verifying payroll and nonpayroll costs” and “confirm the borrower’s calculations on the borrower’s Loan Forgiveness Application, up to the amount required to reach the requested Forgiveness Amount.”

Change of Control Rules
One unknown for both borrowers and their advisors was the consequences of a PPP borrower selling their business before the PPP loan is forgiven.  The government has now provided additional rules for borrowers undergoing a change of control. For purposes of these rules, the government defines three definitions for a “change of control”:

  1. At least 20 percent of the common stock or other ownership interest of a PPP borrower (including a publicly traded entity) is sold or otherwise transferred, whether in one or more transactions, including to an affiliate or an existing owner of the entity.
  2. The PPP borrower sells or otherwise transfers at least 50 percent of its assets (measured by fair market value), whether in one or more transactions.
  3. A PPP borrower is merged with or into another entity.

For all change of control transactions, a 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 proposed transaction.”

There are no other restrictions for borrowers who fully satisfy their PPP loan before a sale or transfer has closed or if a borrower has completed the loan forgiveness process and the government has remitted funds to the lender.

If the PPP loan is not fully satisfied prior to the closing of the sale or transfer, there are special rules.

Generally, the guidance can require a borrower selling (including via a merger) more than 50 percent of its equity or 50 percent or more of its assets to first duly complete a forgiveness application (with supporting documentation), seek approval from a lender (if relevant), and establish an interest-bearing escrow account with the lender in an amount equal to outstanding PPP loan. Borrowers unable to meet the above requirements must seek SBA approval before a change of control transaction.

Finally, the government reminds all borrowers that they remain liable for a PPP loan and are subject to all of the relevant covenants and restrictions even after engaging in a change of control transaction.

Automatic Extension of 10-Month Deferral Period
Previous legislation extended the deferral period for PPP borrower payments of principal and interest from six months to 10 months after the end of a borrower’s covered period.  Despite this extension, lenders, in certain cases, have sent notices to borrowers asking for principal and interest payments even though 10 months have not passed from the end of the borrowers’ covered period. 

In a new Frequently Asked Question (#52, found here), the government reminds lenders that they are “required to give immediate effect  to the statutory extension and should notify borrowers of the change to the deferral period” and that no formal modification of the promissory note is needed. 

Easing the Burden
The simplified forgiveness process for borrowers with PPP loans of $50,000 or less will ease the compliance burdens for many small businesses. Further, the confirmation that eligible expenditures can exceed the PPP loan, and rules for change of control transactions, provide needed clarifications to the forgiveness process. Lenders have begun accepting forgiveness applications and hopefully the government will release further guidance in the coming weeks.

We can help you maximize your loan forgiveness.

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