PPP Loans May Cost You Your Business!!

In applying for forgiveness, you have to verify that you did not misuse the funds you were given. There are rules. The PPP loan money received must be spent within 8 weeks of receipt. It must be spent on payroll and certain other specific expenses.  Loan amounts were calculated based on two and a half times average monthly payroll costs, equaling about ten weeks of payroll; but, as mentioned, it must be spent in 8 weeks.   The math doesn’t work.  This leaves businesses vulnerable since they may violate the loan terms by not spending the money on the proper things within the proper timeframe.  Read the fine print. If you have made a mistake, make appropriate adjustments.  If you screw this up, you will not be eligible for loan forgiveness.  Violating your loan covenants may also subject you to penalties.  

Many owners did not have the chance to assess, before they even applied, whether getting this money would actually help to save their business.  Getting the money might drive the business further into debt.  A restaurant whose breakeven requires it operate at 70% capacity will not be profitable if social distancing requirements allow it to, at most, operate at 50% occupancy.  Make sure that this loan does not delay the inevitable. 

A loan often has interest costs and fees associated with it.  Your bank may have put those these terms in their contracts at rates that were not fully explained to you.  Make sure you check.  If you negotiate any changes, such as fee waivers, make sure they are in writing.  

With things up in the air as to the uncertainty of loan terms, especially terms for forgiveness, you can’t take someone’s word that “the fees will be waived”; “your loan will be forgiven”; “penalties for late payments will not be assessed”; “ your interest costs can be reduced.”  Get any discussion points in writing. If the government decides not to forgive your loan and you have a written document from the bank guaranteeing forgiveness, the bank is on the hook; NOT YOU!

One other thing… loan forgiveness is typically considered taxable income to the person to whom the money was loaned.  Make sure you won’t have a tax bill if your PPP loan is forgiven.  The last thing you need is the IRS coming after you.

If you got a loan and you decide you don’t want it, the deadline for paying back the loan without penalty may have passed.  If this is true, talk to your bank about getting any prepayment penalties waived.  If you decide that you don’t want /need all of the money you were loaned, you might be able to give part of the money back.  Here too, the bank may be willing to absorb any penalties if they know that getting the money back now will save them from having to chase you for it later.