Repaying a PPP Loan: Everything Business Owners Need to Know

This article will cover:

1. PPP Loans: FAQs

• What is a PPP loan?
• Do business owners have to pay back PPP loans?
• How can I get my loan forgiven?

1. How to Repay a PPP Loan

If your small business was one of the many businesses struggling to stay open and pay your employees during the beginning of the pandemic, you likely took out a PPP (payment protection program) loan or EIDL (Economic Injury Disaster Loan) loan. Many small businesses, like this Primary school that Biz2Credit helped during the pandemic, had to take out some type of financing offered through the CARES act in order to stay afloat. However, now that loans are no longer being given out, many business owners are left wondering if and how they have to repay these loans.

While not every business will have to repay all or part of their PPP loans, it’s important for all business owners to have a clear understanding of what conditions determine if they will have to repay any part of their loan, how much they may have to repay, and how they can repay it. With this guide, you’ll be able to get your finances back on solid ground and eliminate any outstanding PPP debt.

PPP Loans: FAQs

As a small business owner, the last thing you need is more confusion and uncertainty around finances. These frequently asked questions about PPP loans will help you understand all of the crucial details of PPP loans, from the initial creation of the program, to loan forgiveness and repayment.

What is a PPP loan?

PPP loans are small business loans given through the Paycheck Protection Program. This program was launched by the federal government to help small businesses keep their workers employed and their doors open during the COVID-19 pandemic.

The PPP was an essential part of the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES act, which was enacted to help struggling businesses and provide worker protection during the pandemic.

PPP loans were provided by banks and other SBA-approved lenders and backed by the SBA and Treasury. These loans offered small businesses financial assistance for payroll expenses and eligible non-payroll expenses. Eligible expenses included:

• Salary, wage, or other compensation for employees
• Payment of cash tips or equivalent
• Payment for vacation, parental, family, medical, or sick leave
• Allowance for dismissal or separation
• Required payments for the provisions of group health care benefits, including insurance premiums
• Payment of any retirement benefits
• Payment of State or local tax, or payroll tax, on the compensation of employees
• The sum of payments of any compensation or income that is a wage, commission, income, net earnings from self-employment, or the full-time equivalent pay that is not more than $100,000 in 1 year.

Non-payroll costs that are eligible expenses include:

• Business mortgage interest payments or business rent or lease payments
• Business utility payments
• Property damage, supplier costs, and other operational costs
• Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act
• Certain types of qualified expenditures such as personal protective equipment (PPE) and renovations to ensure places of work are compliant with government-required social distancing measures

It’s important to note that PPP loans covered the payment of full-time and part-time employees, but not independent contractors, and enabled small business owners to rehire individuals they had to let go because of financial struggles. In fact, both the first and second draw PPP loans had requirements that included a certain number of employees.

Because PPP loans were created in response to a certain economic need, they are different than standard small business loans in what they’re meant to be used for, who can get one, who needs to repay them, and how they can be repaid. Typically, self-employed businesses, independent contractors, sole proprietors, small businesses or 501(c)(3), 501(c)(19), and 501(c)(6) nonprofits with employee headcounts of 500 or fewer, franchises on a location-by-location basis, seasonal venues, and seasonal marketing businesses were considered eligible for PPP loans by the Small Business Administration.

When filing taxes, businesses were not required to report their loan funds as income if they spent all of the loan proceeds but were also initially not allowed to report standard tax deductions, like payroll taxes. However, the IRS changed this ruling in 2021 to give businesses more flexibility.

While paycheck protection program loans are much more specific in what they can be used for than traditional loans, many PPP loans are eligible for PPP loan forgiveness, eliminating the need for repayment of these loans. However, not all PPP borrowers have been able to get loan forgiveness.

Do business owners have to pay back PPP loans?

Small business borrowers can apply for forgiveness with the PPP lender that issued their loan once all the money from the loan has been spent. Borrowers can apply for forgiveness any time up to the maturity date of the loan. However, if you do not apply for forgiveness within 10 months after the last day of the covered period, then you will need to begin making loan repayments to your PPP lender. The covered period is typically either the 24-week period after your PPP loan disbursement date or an eight-week period after that date if you received your PPP loan before June 5, 2020.

To apply for forgiveness on your PPP loans, you have to meet the following requirements:

• Employee and compensation levels are maintained
• The loan proceeds are spent on payroll costs and other eligible expenses
• At least 60% of the proceeds are spent on payroll costs.

These are the minimum requirements for all businesses. You will need to gather all of your payroll and other financial information in order to accurately fill out a loan forgiveness application.

In general, it’s important to know that not all businesses that apply for loan forgiveness get their entire loan forgiven. There are many factors that go into exactly how much you can get forgiven, but two common reductions are the FTE (full-time equivalent) reduction and the wage reduction. A reduction in FTE employees during the covered period of your loan reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees, while a decrease of more than 25% in total wages for any employee also results in a loan forgiveness reduction.

While there are a few other possible reductions, the PPP Flexibility Act introduced rules that allow business owners to get their loans forgiven even if they were not able to fully restore their workforce. This includes two types of safe harbors that can exempt your business from loan forgiveness reductions. The first of these stipulates that if the borrower, in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the covered period at the same level of business activity as before February 15, 2020, due to compliance with requirements or guidance issued between March 1, 2020, and December 31, 2020, then you are exempt from reductions.

Additionally, if you reduced your FTE employee level in the period beginning February 15, 2020, and ending April 26, 2020, and then restored the FTE employee levels in the pay period that included February 15, 2020, by no later than December 31, 2020, for a PPP loan made before December 27, 2020, or the last day of the Covered Period, for a PPP loan made after December 27, 2020, you may also be eligible for exemption from reductions.

Additionally, it’s important to note that if you don’t apply for forgiveness, repayment will begin 16 months after your loan origination date.

How can I get my loan forgiven?

On July 28, 2021, the SBA established an online PPP forgiveness platform called the SBA PPP Direct Forgiveness Portal. If your PPP loan was for $150,000 or less and if your lender has opted-in to the use of the platform, you will be able to submit your PPP loan forgiveness application online directly to the SBA. Using this electronic platform, known as Direct Forgiveness,  is the equivalent of submitting the SBA Application Form 3508S and is the simplest and easiest way to get your loan forgiven.

However, if your lender is not participating, you can still apply for forgiveness, but must do so through your lender. Your lender can provide you with either the SBA Form 3508, SBA Form 3508EZ, SBA Form 3508S, or a lender equivalent.

If you are unable to get full forgiveness on your loan amount, or the forgiveness amount does not cover your full loan, you will be responsible for repaying your outstanding PPP loan amount.

How to Repay a PPP Loan

While many businesses made use of their PPP loans and are eligible for forgiveness, you might need to repay your PPP loan yourself if:

• You aren’t eligible for forgiveness
• You only received partial forgiveness
• You did not end up using all of your loan amount

If you are in the position of having to repay all or part of your loan, you will need to pay it back directly to your loan provider because these loans come from SBA-approved lenders, not the SBA itself.

Your lender will be responsible for informing you of when your first payments will be due.

After you determine how much of your loan is eligible for forgiveness, you can begin paying off any outstanding loan amount.

Some crucial details to know if you are not able to get your PPP loan fully forgiven and must repay part of it include:

• Loans through the Paycheck Protection Program all have an interest rate of 1%.
• The full amount of the loan is due two years from the time that you receive it.
• There are no prepayment penalties or fees.
• Repayment of the loan can be deferred for up to six months, but interest will accrue over this period.

If you got an Economic Injury Disaster Loan (EIDL) in addition to or instead of a PPP loan, you can pay that back directly to the SBA. EIDL loans can be paid back at Pay.gov. These loans have a higher interest rate, 3.75% for small businesses and 2.75% for nonprofits, but are also eligible for partial or full forgiveness dependent upon eligibility criteria.

Wrapping Up

The process of paying back your loan to your PPP lender is similar to paying back a regular loan. However, determining how much you’ll need to pay back is less straightforward because it depends on your loan forgiveness eligibility. Make sure to review the SBA guidance and speak with your PPP lender so that you can properly apply for forgiveness and then determine what you need to pay back.