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News & Knowledge

USA: When to apply for forgiveness of a PPP loan

6th July 2020
Ray W. King - Attorney

The Paycheck Protection Program Flexibility Act (“PPPFA”) modified critical provisions of the CARES Act and the Small Business Administration (“SBA”) rules implementing the CARES Act. Originally the CARES Act required that loan proceeds be expended on allowed expenses during an 8-week “Covered Period.” MSI's Virginia law member Vandeventer Black provides further insight.

The PPPFA changed the definition of the Covered Period to begin on the date of the origination of the Loan and ending on the earlier of 24 weeks after origination or December 31, 2020.[1]  This lengthening of the Covered Period provides Borrowers with greater flexibility as to when to spend the proceeds and ensures that Borrowers will be able to expend all of the proceeds on allowed Payroll Costs and non-payroll expenses.

With the longer Covered Period, Borrowers have been asking when an application for loan forgiveness can be submitted.  For example, if a Borrower has expended all of the Loan proceeds by the 15th week of the Covered Period, can the Borrower apply for loan forgiveness then or must the Borrower wait until after the Covered Period?

On June 22, 2020, the SBA answered this question.   A Borrower may submit an application for forgiveness of a PPP Loan at anytime on or before the maturity date of the loan (either 2 years or 5 years after the origination of the loan, depending on whether the loan was made prior to June 5, 2020).  If the Borrower has used all of the proceeds before the end of the Covered Period, the Borrower is permitted to apply for forgiveness then—the Borrower does not need to wait for the expiration of the Covered Period.  Note,  if the Borrower applies for forgiveness before the end of the Covered Period, adjustments to the amount forgiven due to a reduction in the number of full time equivalent employees (“FTEEs”), or a reduction in employee salaries, wages or work hours in excess of 25%, is still required.  The Borrower presumptively loses the ability to avoid the adjustment by restoring salaries, wages or work hours or increasing the number of FTEEs after the application is submitted, if submitted prior to December 31, 2020.

Even though a Borrower need only apply for forgiveness of a Loan prior to the maturity date of the Loan, the payment deferral period will expire 10 months after the Covered Period.  Thus, if the Borrower does not apply for forgiveness within the 10 months after the Covered Period, the Loan is no longer deferred and the Borrower must begin making payments.  The Borrower’s lender will notify the Borrower of the date on which the fist payment is due.

The SBA has not addressed whether the Borrower will receive a refund of payments made on a Loan should the Borrower be granted forgiveness of the full amount of the Loan, after the Borrower begins making payments.

[1] For PPP Loans made before June 5, 2020, the Borrower can elect the original 8-week Covered Period.

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