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07.08.20

Paycheck Protection Program Gets a Refresh
Frank L. Washelesky

The Paycheck Protection Program (PPP) has received a partial makeover. The PPP Flexibility Act (“Flexibility Act”), signed into law on June 5 together with new Small Business Administration (SBA) guidance, eases some of the restrictions that made it difficult for many businesses — restaurants in particular — to take full advantage of the program. Among other things, the Flexibility Act makes it easier to qualify for loan forgiveness, extends the payment deferral period for PPP loans and increases the term for new loans. Below are some of the highlights.

More Time to Spend Funds

As originally introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PPP required loan recipients to spend the funds within an eight-week “covered period” as a condition of loan forgiveness. Since 75% of the funds had to be used for payroll expenses, this timeframe proved to be difficult for restaurants, many of which were operating with skeleton staff or had shut down entirely. The Flexibility Act extends this period to the earlier of 24 weeks or December 31, 2020. In other words, once a restaurant receives a PPP loan, it must use the funds for eligible expenses within 24 weeks or by the end of the year, whichever comes first, to qualify for forgiveness.

Borrowers that received PPP loans before June 5 may still elect to use the eight-week period if desired.  A borrower does not need to wait the entire 24 weeks to apply for forgiveness if they use the funds sooner.

Less Spending Required on Payroll

Under the CARES Act, forgiveness is available only for funds spent on eligible expenses, which include qualified payroll costs, rent, mortgage interest and utilities. SBA guidance imposed a further condition that at least 75% of the amount forgiven had to be spent on payroll. This was an obstacle for restaurants with reduced staff that had a more pressing need to pay fixed costs, such as rent and utilities. The Flexibility Act reduced the payroll expense threshold to 60%, allowing restaurants to spend up to 40% of PPP loans on other expenses.

Rehiring Period Extended

Under the CARES Act and earlier SBA guidance, the amount of loan forgiveness was reduced for borrowers that cut the number of full-time employees (FTEs) after February 15, 2020, unless they restore the FTE headcounts to previous levels by June 30, 2020. The Flexibility Act extends the time to restore headcounts to December 31, 2020.

Borrowers that fail to meet the deadline may still be able to avoid a reduction in loan forgiveness. The Flexibility Act provides an exception for borrowers that demonstrate that they are either:

  1. Unable to rehire former employees or hire qualified replacements by the deadline; or
  2. Unable to return to their previous level of business as a result of COVID-19-related requirements or guidance issued by the CDC, OSHA or the U.S. Department of Health and Human Services.

More Favorable Repayment Terms

The Flexibility Act increases the loan term from two to five years, for loans approved after June 5, 2020. For existing loans, your lender must agree to extend the term from two to up to five years.

The act also ties the deferral of loan payments to loan forgiveness. Previously, loan payments were deferred for six months, which could require a borrower to begin payments before loan forgiveness is determined. Under the Flexibility Act, payments do not begin until a forgiveness determination has been made. Note, that if the borrower fails to request forgiveness within ten months after the covered period ends, payments will begin at the end of that ten-month period.

For more information contact Frank L. Washelesky at fwashelesky@orba.com or 312.670.6235. Visit ORBA.com to learn more about our Restaurant Group.

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