The Paycheck Protection Program (PPP) Extension Act of 2021 was easily passed by both houses of Congress; the Senate approved it 92-7 and the House voted 415-3 in favor of the bill. President Joe Biden signed the extension into law on March 30, extending the deadline for PPP to May 31 from March 31. The near-unanimous support for the extension shows that the federal government plans to do everything in its power to help small business owners through the coronavirus pandemic.
For lenders, the Paycheck Protection Program is an incredible opportunity to foster relationships with borrowers including small business owners, midsized companies with 100+ headcounts, self-employed people, and sole proprietors.
But many banks and credit unions need to be careful not to repeat the challenges they encountered in the first round of the Paycheck Protection Program. Too many lenders struggled with the origination, management, and ultimately forgiveness of PPP loans.
The PPP loan forgiveness process, in particular, left a lot to be desired with many lenders. Of course, we were talking about a new program with changing eligibility requirements, and a set of underwriting standards that almost no lender would have been familiar with before the pandemic (940-whats?). But borrowers are likely to be a lot less forgiving – no pun intended – now that lenders have had seemingly so much time to tighten up their procedures, and once the money in PPP2 has run dry they will begin looking for their loans to be forgiven in droves.
We don’t have a final tally for this round of PPP activity, but in July 2020, the Small Business Administration (SBA) disclosed that 4.9 million loans had already been guaranteed for $521 billion. This round of PPP activity – which has prioritized smaller loan amounts for small business owners – could end up having an even higher number of loans.
A tiny fraction of that number of loans could easily overwhelm any bank or credit union when all those borrowers start to request loan forgiveness. For that reason, it’s important for bank leaders to know about PPP forgiveness software that can help them deal with the coming influx.
Many Borrowers are Eligible for PPP Loan Forgiveness
The primary purpose of PPP loan proceeds has been to help small business owners with the retention of staff; the SBA has laid out very favorable terms for borrowers that mainly use PPP funds to cover payroll costs.
Here’s how it works:
- The forgivable expenses need to be incurred over a covered period which starts from the time of the disbursement of loan proceeds. The covered period can now be any timeframe they choose between eight weeks and 24 weeks after the funds are disbursed – it is up to the borrower.
- Small business owners must maintain their average full-time equivalent (FTE) employees from pre-pandemic levels, which could mean they need to rehire laid off employees.
- A minimum of 60% of the proceeds must be spent on payroll costs, lower than the original 75% requirement spelled out in the CARES Act for eligible businesses.
- All other expenses (40%) paid out of the proceeds of a PPP loan must fall into the list of approved expenses according to SBA guidelines.
The terms for forgiveness have essentially been the same since last June. What has changed, however, is the deductibility of any Economic Injury Disaster Loan (EIDL) advance from the PPP forgiveness amount. These are no longer being deducted from PPP forgiveness amounts, a situation which left thousands of business owners with small $5,000 and $10,000 loans remaining even after they thought they were getting their loans forgiven. The SBA is handling reconciliation payments for previously-deducted EIDL Advance amounts, and prospective borrowers who have taken EIDL funds can rest easy with the knowledge that they will also face a lower bill from the IRS.
PPP Forgiveness Applications Simplified But Only for Some Small Business Owners
The PPP loan forgiveness application process was a source of stress for countless small business owners last year, but this process has now been simplified for loans of under $150,000. These smaller borrowers will only need to send Form 3508S to lenders.
The form includes information on the loan amount, disbursement date, number of employees, covered period dates, percentage spent on payroll costs, and the requested forgiveness amount. Borrowers don’t need to submit supporting documentation, but could be required to submit it to the SBA if the loan comes up for review or audit. Therefore, small business owners or their Certified Public Accountant (CPA) should maintain excellent records.
The loan forgiveness process gets more complicated for businesses that borrowed more than $150,000. They are required to fill out Form 3508EZ or Form 3508, which involves more questions and calculations than Form 3508S.
Even Form 3508EZ isn’t that long, but the guidelines are deceptively difficult to follow. There is a long list of instructions, and borrowers have to accurately determine the categories of their business expenses such as mortgage interest, supplier costs, and property damage. It’s easy for borrowers to second guess themselves, leading to unnecessary stress at the prospect of a failed loan forgiveness application.
Fortunately, software has been developed to make the process less strenuous. But you are probably wondering: what exactly can a third-party PPP loan forgiveness software do for lenders and borrowers?
PPP Loan Forgiveness Software Automates the PPP Loan Forgiveness Application
Lenders can point borrowers to PPP loan forgiveness software to help them navigate the loan forgiveness guidelines; the software automates the process, removing opportunities to make errors. There are a number of free options on the market that are designed to guide borrowers through understanding how the forgiveness process works. One of our favorites, understandably, is PPPForgivenessTool.com, which was launched in July 2020 as a joint initiative by Biz2Credit and the American Institute of Certified Public Accountants (AICPA).
The way it works is that borrowers or their financial advisors fill out the application, which includes relevant details such as the amount of the PPP loan and the covered period. Then, the tool produces an electronically signed Form 3508, Form 3508S or Form 3508EZ – depending on the PPP loan size – along with other required supporting documentation.
The Loan Amount and PPP Calculators are more capable than you may expect – they can help you handle common PPP issues that aren’t explicitly covered in the instructions. You also no longer have to worry about that guidance changing – which could very well happen again – because the tool is updated when new legislation comes into effect.
What’s even better is that the same software that is powering PPPForgivenessTool.com is available for banks and credit unions to use themselves. A platform such as Biz2X, that enables banks to set up their own PPP forgiveness workflow can make the process that much easier for small business owners, thereby stopping the flood of frustrated customers overwhelming every support channel.
What are the Advantages of Using PPP Loan Forgiveness Software?
PPP loan forgiveness software helps lenders and borrowers save a lot of time and money with the loan forgiveness application process. The loan forgiveness process has been overwhelming for many small business owners, leading some to enlist the services of a CPA to help them avoid any potential pitfalls. Others have elected to fill out the loan forgiveness application themselves without a full understanding of the guidance.
The benefit of a faster and cheaper submission is well-established, but a more overlooked benefit is the ability to easily calculate loan forgiveness eligibility during the eight-to-24-week covered period. By doing that, small business owners can potentially tweak their plans before it is too late to qualify for loan forgiveness. This gives banks that offer these solutions through their online business banking solutions an edge over alternatives and leads to customers being more satisfied with the process overall.
It is also easier to store supporting documentation for a potential audit if everything is being done digitally. Borrowers don’t have to worry about digging up old paperwork years from now. Loan officers can access all information at their fingertips. Plus, the unique underwriting criteria of the PPP forgiveness process are built into the software so there’s no risk that loan officers will miss a step in the process just because they’re unfamiliar with underwriting based on payroll expenses.
By pointing your borrowers to a PPP loan forgiveness software, you are sending them to a third-party for assistance, but you are directly responsible for making their lives easier. With a recent survey by Greenwich Associates finding that 20% of companies said that the pandemic lowered their opinion of their banks, here is an opportunity to turn the tide.
What are the Drawbacks of Using PPP Loan Forgiveness Software?
PPP loan forgiveness software is typically an excellent option for borrowers, but it isn’t a magic bullet.
For one, its easy to become overly reliant on the software. While it can be very helpful for taking over the grunt work, lenders should always advise their small business clients to consult with a CPA for more complex matters. Let’s say a small business owner is unsure if they should alter their business plan to increase the chances of loan forgiveness. That would be beyond the capabilities of PPP loan forgiveness software, and the loan officers working on it, but right in the wheelhouse of a top-notch CPA.
Another drawback is that the software only factors in existing guidelines. If a new law is coming down the pike that may change the forgiveness process, it won’t be reflected in the software for at least a few days after the rules change is announced. This is faster than most banks can change their procedures anyways, but it’s an important point to keep in mind.
Finally, banks and credit unions need to carefully choose their loan forgiveness software provider. The Paycheck Protection Program is still so new, which means that the loan forgiveness software is even newer. Fintechs haven’t had years to work out all of the kinks in their software. Lenders should use software created by a developer with a proven track record; Biz2X and Biz2Credit, with more than a decade of SBA lending experience, have built this experience right into the platform via dedicated SBA lending workflows and integrations. Lenders should look for this same level of expertise when selecting a software solution to handle PPP forgiveness.
PPP Forgiveness is How Lenders Win Lifelong Small Business Clients
The coronavirus pandemic has ravaged thousands of businesses across the country, but the government has provided lenders with a low-risk way to serve small business owners through the Paycheck Protection Program. Lenders need to jump on this opportunity, and do everything in their power to efficiently handle the increased activity.
PPP loan forgiveness software isn’t a cure-all, but it’s a necessary tool in the toolbox for lenders to adequately respond to the long-term nature of the PPP. By deploying the software in the right way, lenders can conserve resources and improve borrowers’ opinions of their financial institutions, turning them into lifelong customers who will always be grateful for the way their PPP loan was handled.