On December 22, 2020 Congress passed the stimulus bill which provides for new Paycheck Protection Program loans and other small business relief. Read more about that legislation and apply for a PPP loan here.
This article was updated June 5, 2020 to reflect changes in the Paycheck Protection Program Flexibility Act of 2020.
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The Paycheck Protection Program (PPP) offers a loan that may be completely forgiven if funds are spent correctly—mainly on payroll. Some small businesses have applied for it as a lifeline only to discover it’s not the perfect fit for their business and may want to return their PPP loan.
Here are 5 reasons you may want to pay back your PPP loan right away:
1. You Won’t Likely Qualify for Forgiveness
One of the main appeals of the PPP is that the loan may be forgiven in full if proceeds are used properly. But the rules around PPP forgiveness are confusing and there are many remaining questions the SBA and Treasury have yet to answer.
Here’s a comment a business owner named Jackie shared on the Nav blog:
“I have received the ppp loan. As a school-age childcare provider, the business was shut down. I applied for the loan and advised my staff to sign up for unemployment while the loan process moved slowly forward. Now, I have the loan and many of my employees are receiving a $600.00 increment which allows them to collect more than if I pay them as usual. The school year has ended and I will not be hiring back until September.”
Some employers will discover they do not qualify for forgiveness and will instead be taking out a loan. While a 1% interest rate on any balance is attractive, the loans carry a two-year repayment period (five years for loans made after June 5, 2020), and in this period of economic uncertainty many business owners are wary about taking on debt. Returning the funds may feel like a safer option.
Update: The PPP Flexibility Act which became law on June 5 2020 makes it easier to obtain forgiveness. It gives employers up to 24 weeks to spend funds and still be eligible for forgiveness. It also allows employers to avoid a reduction in forgiveness in certain circumstances, including if they are “able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID– 19.”
2. You May Lose Employees Anyway
The primary purpose of PPP is to help employers keep employees on their payroll so they can be ready to return to work when business resumes. But some employers are finding that difficult to achieve, due to financial concerns, health concerns or both.
Traci shared her dilemma in response to a Nav article about PPP loans:
“My employees are all part time – and with the PUA and unemployment, they are making double being on this assistance. I was just approved for a PPP loan and no one wants to come back to work. What do I do? HELP!”
Some employers have reported their employees stand to make more through Pandemic Unemployment Assistance than they would if hired back and paid using PPP funds. Other employees are afraid to come back into a workplace where they may be exposed to coronavirus.
And of course some workplaces are closed, or business is so slow that employers can’t find meaningful work for their employees to do anyway. It’s confusing and frustrating to employers to pay their workers not to work, or to try to find something for them to do.
If you offer employees their job back but they don’t accept the offer to come back to work, they may lose unemployment benefits. (Note they may qualify for Pandemic Unemployment Assistance under specific circumstances, even if they do not return to work.) Even if you do bring them back and they are making less money than they would have on unemployment, they may be resentful enough to look for another job in the future. It’s a tough decision many employers are facing— especially those with lower-wage employees.
3. You’d Rather Get the Employee Retention Tax Credit
In addition to other programs, the CARES Act created the Employee Payroll Retention Tax Credit. Employers whose operations were fully or partially suspended due to government orders, or who experienced a major decline in receipts, may be eligible for a employee retention tax credit against Social Security wages for up to 50% of $10,000 in qualified wages (including health plan expenses) paid after March 12, 2020 and before January 1, 2021.
Eligible employers can get immediate access to the Employee Retention Credit (ERC) by reducing employment tax deposits they are otherwise required to make or even get an advance payment from the IRS if the employer’s employment tax deposits are not sufficient to cover the credit.
But employers can’t get both a forgivable PPP and this tax credit. Some employers who applied weren’t aware of the Employee Retention Credit, or didn’t discuss the two options with their accounting professional before they applied for PPP.
“An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 14, 2020 – note: later updated to May 18, 2020) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer for purposes of the credit.”
If you have any questions about the ERC and whether it is a better fit for your business, now is the time to consult your accounting professional.
Update: The PPP Flexibility Act permits employers and the self-employed that received a PPP loan to also qualify for payroll tax deferment. This allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes. (This is different than the Employee Retention Tax Credit.)
4. You Aren’t Sure Your Business Will Survive
A survey by Thryv and America’s SBDC found that slightly over half of business owners surveyed said they were likely to recover completely or 75% of their business one year from now and 7% do not think they will survive at all.
“My restaurant was just notified we did receive the PPP today but our lease is over July 1st and we need to relocate the restaurant. We are not sure when we will be able to open for sure. Should we not take the PPP loan offered? We are not sure what to do because we can’t start using it right away for 8 weeks in a row.” – Jennifer
If you cannot qualify for forgiveness, it might make more sense to return your PPP loan, rather than wind up with additional debt. Granted, it’s a pretty attractive loan. Unlike other SBA loans, PPP loans carry no personal guarantee, no collateral is required, and are non-recourse loans if the funds are used for authorized purposes. (See The CARES Act section 1102.)
But what if you never reopen your business and can’t or don’t repay a portion of the balance in authorized ways: could you be on the hook personally for that balance? It seems entirely possible. Even if you aren’t, defaulting on a federal loan of any type is serious business. At a minimum, it typically means you aren’t eligible for any other federal loans for at least several years.
5. You Didn’t Really Need the Funds
When applying for PPP, the CARES Act requires borrowers to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Initially that didn’t seem to be a huge deterrent as most businesses are facing economic uncertainty, but after a backlash due to a number of publicly traded businesses who obtained PPP loans, the SBA has indicated it will audit businesses that received more than $2 million in funding in addition to “other loans as appropriate.”
What are they looking for? According to Treasury guidance:
Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification…
In the Interim Final Rule published in the Federal Register on June 1, 2020, Treasury and the SBA stated loans of any size may be reviewed by the SBA. Specifically it says:
For a PPP loan of any size, SBA may undertake a review at any time, at SBA’s discretion. For example, SBA may review a loan if the loan documentation submitted to SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan, or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.
And it goes on to say:
If SBA determines that a borrower is ineligible for the PPP loan, SBA will direct the lender to deny the loan forgiveness application. Further, if SBA determines that the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate. SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
6. You Applied Fraudulently
If you saw this program as a gold rush of free money and decided to take advantage of it by filing a false application, you may be in trouble. Investigations are already starting. The Justice Department has announced it has charged two businessmen in the District of Rhode Island with allegedly filing bank loan applications fraudulently seeking more than a half-million dollars in PPP loans. If you applied fraudulently you’ll likely want to return the funds— and call a lawyer.
How To Return PPP Funds
If you have already received PPP funds and changed your mind, talk with your lender. There is no prepayment penalty if you pay back one of these loans early though interest will accrue.
This article was originally written on May 8, 2020 and updated on January 20, 2021.
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