Timing is everything. This has never been truer when it comes to the Paycheck Protection Program (PPP) loans. From the moment PPP loans became available to small businesses on April 3, 2020, it has been a mad rush to get things filed and spent within certain specific dates. Further, it has not been uncommon for Treasury to release FAQ guidance on Friday nights. For many borrowers and tax professionals, it has been a dizzying process.
On June 25th, Treasury released another FAQ that will impact many borrowers as it determines the maturity date of the loans based on when the SBA loan number was assigned. The FAQ specifically states, “If a PPP loan received an SBA loan number on or after June 5, 2020, the loan has a five-year maturity. If a PPP loan received an SBA loan number before June 5, 2020, the loan has a two-year maturity, unless the borrower and lender mutually agree to extend the term of the loan to five years.”
While many tax professionals were aware of these maturity dates, they may come as a surprise to PPP borrowers. Further, the significance of the date is quite random.
“That was the date the Flexibility Act was signed into law,” explains Eric Hjerpe, CPA and Managing Partner, Hjerpe & Tennison CPAs in Bloomington, Illinois.
Yet, the date of your loan will have long term ramifications on your small business. It is important to understand the impact.
Two Years Versus Five Years
Much of the focus on PPP loans is on the forgivable nature of them if used for payroll, rent and utilities. However, for a significant portion of borrowers, not all of the loan will be forgiven. The unforgiven portion will be converted to an SBA loan at a rate of 1%.
Most practitioners feel that those who received loans after the June 5th date might be in the better position.
“I think it helps those who got loans dated after the release date of the Flexibility Act,” says Hjerpe. “They get a 5-year maturity where those who received prior (the vast majority) are stuck with a 2-year loan.”
But borrowers who were given their loan number before June 5, 2020, will have a unique decision to make: to stick with a two-year loan or work with their borrower to extend to five years. The question is whether these borrowers will think through this decision with a long-term view, especially since many will see a two-year loan as more appealing.
While a two-year loan at 1% is attractive, these borrowers must consider their overall business strategy. Small business owners have long known the challenge of getting access to cheap capital, even before the Covid-19 crisis. To a large extent, that was the very reason for the PPP programs, since many small businesses did not have strong capital reserves.
Small business owners must have an eye toward the future. We are not yet at the end of the Covid-19 crisis. Flare ups and shuts downs will likely continue well into 2021. Preserving cash is important to help protect the business against vulnerabilities.
Doing the Analysis
Consider this situation. A small business applied for and received a $200,000 PPP loan. By using the loan primarily for payroll, utilities and rent, the business owner was able to have 75% of the loan forgiven, leaving $50,000 to be paid back to the SBA.
At 1%, a two-year loan of $50,000 results in a monthly payment to the SBA of $2,105. The same loan over a five-year period is $855 a month.
For many small businesses, the monthly savings of $1,250 a month can make a big difference. One thing that has become obvious during this crisis is that many small businesses function on a small margin, so choosing the longer loan period can create better options for the business.
Banks, however, may not be inclined to accommodate a request to extend the term. “I don’t see many banks wanting to extend these beyond 2 years, so that negotiation will likely be one sided,” Hjerpe says.
For business owners who feel strongly about getting the longer maturity period, it may be an uphill battle. Further, like much of the PPP loan process, banks may be more accommodating for borrowers who have had strong relationships with them in the past.
Tough Business Decisions
The PPP loan process has been an exercise in making tough business decisions in a short period of time with incomplete information. In reviewing your loan maturity, borrowers have an opportunity to make a more complete business decision on repayment. However, it remains to be seen if the banks see it the same way.