Microbusinesses are struggling to survive the status quo; no wonder all eyes have been on the Paycheck Protection Program (PPP) fund, which Congress passed through the CARES Act.

But small businesses must tread with caution because missing on a few details may mean trouble in the future.

For instance, many small merchants only know that—if you take out a PPP loan— forgiveness or leniency is possible. But only a handful know what could compromise your chances of qualifying for leniency?

First, if you already have such a loan, you have up to 8 weeks to max out the finances on eligible expenses to qualify for loan clemency or repay the loan.

Secondly, we’ve seen several amendments in PPP loan program policies since the CARES Act swung to effect— and we may witness more changes—so you want to keep track.     

PPP loans were passed for two main reasons; (1) to give micro-businesses the finances they need to live through the COVID-19 lockdown (approximated to last two months). (2) To help businesses retain employees and control job losses.

But while CARES Act loans were meant to help businesses survive COVID-19, failure to understand a few details could mean problems in the future.

That said, let’s dig deeper into PPP loans and forgiveness.

1. Cares Act Loans have an unclear “good faith” policy

Loan leniency is possible, but only if you’ve been found to have acted in good faith at the time of application.

A business owner must confirm that they sought relief funding— in good faith— to support their business and wasn’t able to access funding from other sources.

Your finance provider determines whether you acted in good faith or not. This unclear good faith policy could be the reason you face repayment instead of enjoying loan forgiveness.

2. You have to put the Funds to use immediately. You can’t save it for later!

According to the CARES Act, you must max out the funding in 8 weeks from the time of disbursement.

This 8-weeks order is a concern because some businesses have no choice but to shut down operations. Yet the loan terms require you to keep employees on payroll—even if they are not working.

That being said, businesses must consider their position before taking out a PPP loan.

3. Spend 75 percent to Pay workers or pay back the loan

Some PPP loan conditions may be unclear, but terms are plausible when it comes to what you can use it for;

Seventy-five percent MUST go to payroll while the other 25 percent may be spent on rents, mortgages, and utilities.

This spending restriction limits the loan’s flexibility, which explains why small business unions have been teaming up to push for the payroll allocation to 50 percent.

4. What if you suspended some workers?

If you laid off some employees, you could choose to rehire or not.

Your bank will only check the amount spent on payroll to see it matches the average amount for last year.

5. What kind of documentation do you need to enjoy forgiveness?

To avoid the hassle of keeping complex records, separate PPP funds from other funds. Use a payroll service provider to keep records of every cent you spent the money to pay workers.

On top of that, document any spending that goes in utilities, rent payments, mortgage, and interest payments.

6.  When do you start seeking loan leniency?

Many lenders will start looking into your forgiveness request seven weeks from the time of the funding.

Final Words

Remember, your lender decides whether you qualify for PPP loan forgiveness or not. For that reason, it is a good idea to work side by side with your loan provider.

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