On May 15th, the SBA released the much anticipated Loan Forgiveness Application for SBA borrowers under the PPP program. We have converted that application to Excel – Download our PPP Loan forgiveness calculator here. On May 22nd, the SBA released an “Interim Final Rule” that provides additional guidance towards implementation of the loan forgiveness application.
Please see our important disclaimer regarding use of the calculator inside the Excel spreadsheet. We recommend all borrowers consult with their bank, legal, financial, and business advisors regarding interpretation and implementation of the loan forgiveness program. We aren’t part of the SBA and clearly aren’t PPP experts, but we hope you will find our calculator educational and informative.
One overlooked aspect of the PPP is the calculation of debt forgiveness. We believe that without changes many borrowers will owe between 10% – 30% of their SBA loan amount after the 8-week post-loan period due to:
1) Lack of demand – Many businesses will not see robust demand for their products or services while coronavirus rages and will be reluctant to rehire laid off workers especially those which can’t operate at full capacity due to governmental restrictions.
2) Lack of supply – Many businesses will have difficulty rehiring due to robust unemployment compensation that in many cases is more than their pre-coronavirus wages. The SBA did account for this scenario in the forgiveness application and is making exceptions in cases where employers attempt to rehire but the employees decline.
3) The math – The calculation of the maximum SBA loan amount is based on 2.5x months of payroll costs (~76 days), whereas the loan forgiveness calculation is based on eight weeks (56 days). So the debt forgiveness period is 74% shorter than the maximum debt calculation period.
Stay tuned in the weeks and months ahead to see if there are legislative or executive action taken to modify the loan forgiveness calculations. We are speculating the most plausible modifications to the forgiveness program will be:
* Allowing forgivable non-payroll expenses above 25%. The 25% limitation was not written into the CARES Act.
* Modifying start date of forgiveness period. Currently the eight week window starts at on the loan disbursement date. We believe there will be flexibility provided here for businesses that can’t operate at full capacity due to government mandates (e.g., eight weeks may start the first week in which a business isn’t restricted in terms of customer capacity).
* Providing more than eight weeks for forgiveness. Providing 12 to 16 weeks is the most plausible adjustment, which would dramatically reduce the stress level for many small business entrepreneurs with PPP loans.