Forgiveness of CARES Small Business Loans

The federal CARES Act is the U.S. congressionally initiated an emergency funding program that has allocated $349 billion in loans and other assistance for small businesses this year (2020). The program was launched to help entrepreneurs like small power sweeping business owners weather the economic crisis brought on by the coronavirus and the resulting national economic shutdown. Let’s take a look at what’s happening at this point during the pandemic, with the handling of these government loans that borrowers received through the CARES ACT with the expectation that their loans would ultimately be forgiven.
The shock from the economic shutdown to the small business subsector has been astronomical. At the peak of the shutdown, about 87% of the U.S. population was under a quarantine order to stay at home. Around 45% of small businesses were temporarily closed during some part of 2020, and employment dropped by about 40% in affected companies. Business Insider reported in late July that around 55% of all pandemic-related business shutdowns since March 1 had already become permanent closures.

COVID-19 Effects on the Powersweeping Industry

Fortunately, many commercial and industrial power sweeping operations have been identified as essential businesses, and were either minimally affected or not at all. Others, however, have struggled during this national economic crisis. Even some deemed essential have lost very large percentages of their business, because many of their customers’ business volume, especially those in retail products and services, has plummeted since the onset of the pandemic. Those who have stayed afloat with the help of CARES-funded loans are probably well aware that the program’s loan repayment or forgiveness phase has begun.

CARES Loan Repayment and Forgiveness Phase

Here’s what we’ve learned about the status of CARES funding lenders and the 5.2 million borrowers in this beginning period of the loan forgiveness stage of the federal Paycheck Protection Program (PPP). Many lenders’ are currently waiting for clarification and guidance from the federal government, while the population of small business owners holding CARES loans are now awaiting permission from their banks to apply for loan forgiveness through the PPP.
The Harvard Business Review looks back at April when so many businesses found themselves quickly in desperate need of cash and worried about eligibility for the PPP, and the chaotic start of the CARES small business emergency assistance program complicated application processing. The program participants experienced delays in obtaining the loan proceeds, and many expressed deep uncertainties about whether or not the loan would be ultimately forgiven in their case.
The HBR reports that the messy rollout of the program, which exacerbated these anxieties and even prevented many small business owners from applying is now followed by a confusing loan repayment and forgiveness phase that is causing those worries to persist.
The money for CARES small business emergency loans was funneled through banks to recipients, and those lenders quickly became inundated with applications. Amid the confusion, what was clear was the rule that using the majority of the loan for paying employees would ensure that the debt would be forgiven. But, complexities have since evolved in executing processes to obtain forgiveness of the loans. Now, borrowers and lenders alike are still hoping that Congress will pass the necessary legislation to forgive debts under $150k automatically.

UPDATE: CARES Rule Change

The SBA’s released information this month (November 2020) about a change in a feature of its rule regarding loan forgiveness. The SBA currently advises that loans under $50,000, which are almost 70% of loans issued under the PPP, can have the loans forgiven, even if the borrower reduced staff or payroll at his or her business after receiving the loan. The CBA’s response to the change renewed the organization’s call on Congress to forgive all CARES PPP loans under $150,000 automatically, as had been originally announced would be the rule.
The NYT discusses concerns regarding the current obstacles for lenders and borrowers in going through the forgiveness process as it is currently written, i.e., without information about how critical aspects of the loan forgiveness would work. For example, lenders have emphasized the difficulty in meeting all requirements due to a lack of clarity about how meticulously they are expected to validate payroll records of borrowers for loans under $2 million, and other key directives. Further, lenders have emphasized concerns about being repaid by the government for loans they made to businesses that ultimately closed down or filed for bankruptcy.
One banker reportedly said, regarding borrowers’ worry that their loans would not be forgiven due to mistakes on their paperwork, “We can’t help our borrowers if we don’t understand the guidance.” a majority of borrowers took their loans before the rules changed, which means technically that lenders need to modify all those loans, by having each borrower sign off on the changes — an enormous undertaking.
Complications with loan parameters and stipulations detailed in an Entrepreneur magazine highlight many practical concerns for borrowers about their actual eligibility to meet payroll and rehiring criteria for loan forgiveness. Additional potential tax issues have further muddled borrowers’ picture of what they’ve signed up for.

SBA Status of Information to Lenders on CARES Loan Payments

The SBA has still not yet responded to banks’ efforts to get clarification on key questions about how the loans are to be managed, and borrowers’ payments are beginning to come due this month. Fortunately, most lenders have decided to risk postponing all PPP loan payments at this time, and they are advising borrowers to wait for legislative remedies in the loan forgiveness process.
It’s been suggested by at least one lender that automatic forgiveness is still likely, partly because trying to collect from cash-strapped small businesses is simply too impractical. It also appears that there’s something of a consensus in Congress on ensuring that borrowers are not taxed on their forgiven PPP loan proceeds.
Power sweeping business owners who have received PPP loans may be encouraged that it appears likely that these and other questions will, at some point, be resolved in the favor of borrowers, but currently, lenders are still determining much on their own about how to proceed through the now-arrived repayment and forgiveness phase, as they await the comprehensive direction that is necessary a fuller understanding.

Additional Information Resources

https://www.nytimes.com/2020/10/09/business/small-business-ppp-loans-forgiveness.html
https://www.entrepreneur.com/article/350444
https://hbr.org/2020/04/a-way-forward-for-small-businesses
https://www.businessinsider.com/permanent-business-closures-increased-march-coronavirus-pandemic-yelp-2020-7

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