On June 19, 2020 the SBA posted an Interim Final Rule to implement changes made the Paycheck Protection Program (“PPP”) by the Paycheck Protection Program Flexibility Act (“Flexibility Act”). The majority of the provisions of this new Interim Final Rule amend the SBA’s initial April 20, 2020 rule to include the Flexibility Act’s new regulations.
What does this mean: Overall, the Flexibility Act is the SBA’s acknowledgement that the Cares Act did not meet the reality of most businesses that were negatively impacted by COVID-19. The period during which businesses have been (and continue to be) negatively impacted is far in excess of the original eight-week period that was contemplated by the Cares Act.
What has changed? The following:
- The “covered period” governing the use of loan proceeds and eligibility is amended to begin on February 15, 2020 and end on December 31, 2020, rather than June 30, 2020.
This means that the period during which loan proceeds may be used, and potentially forgiven, has been extended.
- The revised Interim Final Rule defines the forgiveness period as the 24-week period beginning on the date the loan is disbursed. However, if a PPP loan was made before June 5, 2020 the borrower may elect to have the forgiveness period be the 8-week period beginning on the date of loan disbursement.
For most PPP borrowers this means you have a choice of forgiveness periods – stay with the original 8 weeks, or extend the period to 24 weeks. This will enable borrowers that would have previously been unable to exhaust their PPP loan within 8 weeks to do so.
This does not mean that the loan proceeds must be spent over the entirety of the 24 week period – it only means that there is a longer time to spend the loan.
Note that extending the loan period to 24 weeks is implicitly an extension of the representation made during the loan application and draw down process – that your business continues to or is likely to suffer negative impacts from COVID-19 and that it requires the PPP loan to fund payroll and other permissible expenses.
- There is now a minimum maturity of 5 years for all PPP loans made on or after the date of the Flexibility Act’s date of enactment. All loans made before June 5, 2020 will still have a maturity date of 2 years, but borrowers and lenders may mutually agree to extend the maturity of such loans to 5 years.
- If a borrower submits a loan forgiveness application within 10 months after the end of the forgiveness period, the borrower will not have to make any payments of principal or interest on the PPP loan before the date on which the SBA remits the loan forgiveness amount to the lender or informs the lender that no forgiveness is permitted.
- Borrowers who do not submit a forgiveness application within 10 months following the end of the forgiveness period must begin paying the principal and interest after that 10-month period.
- Borrowers can now spend at least 60 percent of their loan proceeds on payroll costs in order to achieve full loan forgiveness. This was previously at 75 percent. The SBA and the Treasury Department are interpreting this requirement as a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness. As a result, if borrowers do not spend 60% of the funds on payroll costs, they must reduce their forgiveness request so that the payroll costs are 60% of the forgiveness amount. The Flexibility Act also clarified that this percentage relates to forgiveness only and does not otherwise proscribe loan use.
- In addition to the new regulations, the SBA has issued revised versions of the loan application materials, forgiveness instructions and a new “EZ” forgiveness application to align with the Flexibility Act’s changes. The mechanics are unchanged but borrowers should ensure they are using updated forms during the process.
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