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PPP Loan Forgiveness: Timelines and Terms

Jenny Shtipelman, Senior Vice President and Commercial Loan Officer at National Capital Bank, joins Charlie Venus for a very timely topic. In this two-part series, Jenny gives us a quick review of the PPP loan program. We cover the difference between 1st and 2nd draw loans. As well as the timelines a business has once the assistance has been received. If you benefited from the PPP and are looking for what your next steps are, start here.





Edwin K. Morris (8s):
Welcome to the trusted advisor podcast brought to you by Iroquois. Iroquois is your Trusted Advisor in all things in insurance. This week, you are listening to the special segment of Charlie’s corner hosted by our very own Charlie Venus.

Charlie Venus (25s):
Welcome to today’s podcast. Today, we have Jenny Shtipelman, senior vice president and commercial loan officer at National Capitol Bank in Washington, DC. She is with us today to talk about the paycheck protection program and how to navigate the loan forgiveness process. Before jumping into our conversation, let me tell you a little bit about Jenny. With a rare blend of marketing and operational skills, she’s achieved extraordinary results in growing sales and profits at national capital bank, as well as in her prior roles at Eagle bank and Citibank. Her current focus is on expanding and supporting the bank’s clients in Maryland, DC, and Virginia.

Charlie Venus (1m 7s):
She received a BBA in finance and marketing from the George Washington university. She holds small business consulting and financial management certification from Cornell university. Jenny was also voted one of the top 100 bankers in the greater DC area. Welcome, Jenny.

Jenny Shtipelman (1m 25s):
Thank you, Charlie, a pleasure.

Charlie Venus (1m 27s):
You know, I’m in insurance, you’re in banking, and we always have the same disclaimers that we have to throw out there. So before we get started, I want to give you the opportunity to throw out a disclaimer from your standpoint relative to this podcast

Jenny Shtipelman (1m 42s):
And it will be relative to the podcast, but also specifically to this topic. Paycheck protection program is very new. And even though we’ve all been kind of swimming in this pond since specifically April 3rd, 2020, it’s still, we’re all learning as we go. Now specifically the paycheck protection program is administered through the SBA, small business administration, through banks. And while I work for national Capitol bank and that’s who I am running this program for, other banks have different policies and processes that their borrowers may have to adhere to. So just to keep that in mind, that what I am speaking to in regards to the topic is specific to the interim final rules released by the treasury and small business administration and specifically the process of national capital bank.

Jenny Shtipelman (2m 38s):
So you may, if you have any further questions, you may need to check with the bank that you processed that loan with.

Charlie Venus (2m 44s):
Well, great. Thanks for that, Jenny. So can you first provide us with a quick recap of the PPP Loan program?

Jenny Shtipelman (2m 53s):
Sure. And this is going to be a super quick recap. This is not even the highlights or the bullet points. It’s just an understanding of what it is. So the paycheck protection program was rolled out in, in amazingly short time, by the government and the small business administration, the treasury. I think from start to finish, it all went from probably March, maybe in mid March, and then it was released to everyone on April 3rd. The purpose of the program because of the shutdown that happened on Friday, March 13th, 2020, was to provide funds to business owners with various caveats as to the type of business, the size of business, etc.

Jenny Shtipelman (3m 35s):
So that they can pay their staff, even if they are not working. But, so that way, in turn, their staff can pay their rent, their bills, et cetera, et cetera. The way that the program works is that once it is applied for, and the funds are received, the borrowers actually sign a loan agreement. So it, it does work as a loan with very specific terms dictated by the SBA up until the borrower applies for forgiveness for that loan. As long as the funds were used for authorized expenses, once the SBA approved the forgiveness application, then they pay the bank back on behalf of the borrower and the funds are completely forgiven.

Jenny Shtipelman (4m 18s):
And so then it essentially turns into a grant, and how it’s treated from then on, I always say the borrower should speak to their CPAs and the attorneys, et cetera, in terms of the tax treatment and such. Essentially the program is to support small businesses across the nation, in paying their staff and keeping their staff. And it is forgivable, if the funds are used for authorized expenses.

Charlie Venus (4m 42s):
Now there were a couple of bills past after the loan program was implemented. Did that change the program in any significant way?

Jenny Shtipelman (4m 50s):
It did, it did for sure. And again, I take my hat off to the government, which they don’t do many things quickly. They did this super quickly. And that is one of the reasons why there have been so many changes. One of the things that we’ve said to our borrowers time and time again for 15 months now, even though less so now than in the beginning, is that the only constant with this program is change. And for everyone to have patience, because the way that it was designed in the very beginning is not necessarily the way that it looks now,. For example, the original terms of the program, the calculation of the amount was for 10 weeks or two and a half months of annual payroll. Now, originally the covered period, which is the period of time in which you had to spend those funds and then you can apply to have them forgiven.

Jenny Shtipelman (5m 38s):
Originally it was eight weeks. That has since changed to anywhere in between eight and 24 weeks. The term of the loan has changed, some of the expenses that are now allowed to be used, or the funds to be spent on in the program have been expanded. So there’s definitely been a fair amount of changes. The latest ones rolled on December 27th, I think it was the economic aid act if my memory serves me right. So the name of all the specific bills, there have been over 20 of what the SBA calls interim final rules, which in my mind is a little bit of an oxymoron, “interim final,” however, but you know, we’re kind of rolling with the punches here and whenever they’re released, the latest one is essentially what we go by.

Jenny Shtipelman (6m 23s):
And so the program has expanded in the ability of how the funds can be used or the time that the funds can be used in, the ease of applying for forgiveness. The very first the application that the government came out with was 11 pages specifically for forgiveness. And I think everyone had mini-heart attacks and heart burn once they saw them, because not only the board that would have to figure out how to do it, but the bankers would also have to figure out how to – we’re supposed to check them, right, and, and approve them on our end so what do we do? So now the majority of it has been simplified, it’s based on loan amounts. And so there’s been a fair amount of change, you know,

Charlie Venus (7m 3s):
What constitutes the qualify expenses?

Jenny Shtipelman (7m 6s):
From the very beginning, the purpose of the program, and this is my personal opinion, but I imagine that the reason why this program was in originally rolled out is essentially to prevent so many people who were being laid off to go and apply for unemployment, because that just created bottlenecks of epic proportions and there were already happening. And so this was to pay employees so that they don’t have to go on unemployment. So the biggest, basically authorized expense that this program is supposed to be used for is payroll. As a matter of fact, there is a rule in the program when you are applying for forgiveness at at least 60% of funds have to be used for payroll in order to qualify for forgiveness.

Jenny Shtipelman (7m 47s):
As a list of expenses you can use these funds for is payroll and expenses associated with payroll, such as employer paid group health, employer paid state and local taxes, but not federal taxes. It has been expanded to the non-payroll expenses. So the 60% has to be used for payroll, the 40% can be used for payroll or the non-payroll expenses include rent, principle payments, to cover the mortgage obligations. So if someone owns their office space, mortgage interests. They can use those funds to pay interest on those loans, utility payments. So your telephone, your internet, any type of gas or electric that is involved, covered operation expenditures.

Jenny Shtipelman (8m 32s):
So payments for any business software or cloud computing service that facilitates the business operations, covered property damage costs, and, and that is related to property damage or vandalism due to a public disturbances that occurred last year as well. They want to make sure that those are covered. Covered supplier costs, expenditures made to cover the supplier of goods that are essential to the operations of the borrower at the time of which of the expenditure is made, and covered worker protection expenditures. So any funds that the business has spent on any type of barriers or PPE or anything like that.

Charlie Venus (9m 6s):
Any COVID related protective measure is covered as well. As far as the, the payroll piece, that covers salaries, wages, what about tips, commissions? Is that covered as well?

Jenny Shtipelman (9m 19s):
That is, and a big thing to note is that in the salary piece, and this is how they protected the small businesses and made sure that it’s, not too much money gets spent to executive management or whatever. Every single individual was capped at a hundred thousand dollars annualized. And so even if someone, you have a key employee and they normally make $200,000 a year, or you’re an owner of the business and normally you make more than a hundred thousand dollars a year. When you’re calculating your loan amounts, and then in turn, you’re calculating loan forgiveness, you have to cap yourself at a hundred thousand dollars cap cash compensation per year, and then divide it Further by whatever the covered period is.

Jenny Shtipelman (10m 3s):
Also for specifically owners of businesses, Now, the covered period can be anywhere between eight and 24 weeks. Well, eight weeks, 10 weeks of a a hundred thousand dollars is, I mean, especially 10 weeks is a $20,833. 24 weeks is obviously much more. The government decided that if you own the business, then a, you are capped at $20,833, if you use a covered period that’s longer than 10 weeks. If you use anything shorter than 10 weeks, for example, the smallest is eight weeks, then you actually have to calculate whatever that is with the minimum being $15,833, which was the eight weeks equivalent of a, a a hundred thousand dollars cash compensation.

Jenny Shtipelman (10m 46s):
And then the max being $20,833.

Charlie Venus (10m 51s):
How about independent contractors? How does it work for them?

Jenny Shtipelman (10m 54s):
Similar, similar. Okay. So first of all, if you’re an independent contractor and it’s just yourself, the way that you calculate your loan amount, or you calculated, past tense, your loan amount is you took, your schedule C and in the very beginning of the program, you had to use the net income number of your schedule C, because that’s what the government is considered to be you’re payroll. And then you divided it by 12 and times two and a half is essentially 10 weeks. In this year’s, 2021, in this year’s run of the PPP, they actually amended, so instead of having to use net income number for independent contractors and sole proprietors, you could now use a gross income.

Jenny Shtipelman (11m 34s):
Again, you had to cap it at a hundred thousand and then divide it by 12, and times two and a half. So it is still the max, it’s just yourself with no employees is $20,833 for cash compensation.

Charlie Venus (11m 46s):
I’ve heard about second drawer forgiveness. What is that?

Jenny Shtipelman (11m 50s):
So second drawer forgiveness, and this is where we are looking at where now in the year of our PPP loans, and depending on who you ask, there’s been several kind of iterations of the PPP loans. The first one was April 3rd through about April 15th, 2020. That was the very first round that this came out. It went fast and furious. Then the government increased or replenished the program and in about May it reopened again and ran through August 9th of last year. And then actually there were still some funds left in the program by the time of the program ran out. And so then, on December 27th, the program was replenished.

Jenny Shtipelman (12m 32s):
And we started again to begin in January of 2021. So the change in January 2021, as opposed to last year’s programs, the last year, you could only apply for the PPP once. So if you already applied, that was it. That’s all the money that you could get. Some of the changes that came around in December 27th that were implemented in January, is that businesses that have applied last year, could apply again, using the same formula. However, what they have to show was that they had at least a 20% or 25% drop in top line revenues. And then you, one quarter of 2020 as compared to the, in the same quarter in 2019, or 2020 annually compared to 2019 annually.

Jenny Shtipelman (13m 23s):
So if businesses could show the drop in revenues, then they could apply for the PPP again and get funded again. So 2020 PPP loans were called first draw. Anyone who applied again for the second time, those are second draw PPP loans. And forgiveness rules are working in the same way for, for SBA loans as they do for the second draw loans in terms of rules, you know, how you can spend the funds, et cetera, et cetera.

Charlie Venus (13m 50s):
And then what about for second draw is that, is the timeframe for spending the same amount of time?

Jenny Shtipelman (13m 56s):
From eight to 24 weeks, you can spend the funds on the same expenses. Now, the interesting thing is, and this is where people who got the money early, obviously could use them for payroll, et cetera. Some of the further changes with a non-expansion or non-payroll expenses didn’t happen until later in the period, either late last year or beginning of this year with December 27th law. And so some of our clients who are applying for forgiveness now in actually those debts, the grace period deadlines are coming up here shortly, but the borrowers who are applying for forgiveness for last year’s loans may be able to include more expenses than people who applied for forgiveness, For example, in the fall of last year.

Jenny Shtipelman (14m 44s):
However, again, people who spent all of those funds on payroll, they’re still getting it forgiven a hundred percent. It’s just that some of the businesses who had other expenses who weren’t able to spend all of it in payroll, now it can include some of the other operating expenses that they weren’t able to before.

Charlie Venus (14m 58s):
But those operating expenses still cannot exceed 40%

Jenny Shtipelman (15m 2s):

Charlie Venus (15m 3s):
Now what’s the deadline for applying for the, for a loan forgiveness.

Jenny Shtipelman (15m 5s):
That’s going to be based on everyone’s individual funding date and the way that the law or the interim final rule, I should say, reads is that, and it’s a little bit of a timeline, so just bear with me here, if you have a ruler or something like that. So essentially the, the, the first important date that you have is your funding date. That’s the day that the funds were deposited into your account. From that funding date, you have anywhere between eight and 24 weeks to spend the funds, and that’s called your covered period. Let’s say that, and there’s no a drawback to using a 24 weeks vs. the eight weeks vs 15 weeks or however long you want.

Jenny Shtipelman (15m 47s):
Obviously, if you use the full 24 weeks, you have more time for those expenses between payroll, whatever it is that you decide to spend your funds on. So essentially you, you have your funding date, then you have your end of your covered period. Let’s say it’s 24 weeks, which is a little bit less than six months. So from the last day of your covered period, you then have 10 months to apply for forgiveness where in that time, between your funding date and the end of that 10 months, you are not responsible for any principal or interest payments. Because remember it is still a loan during that time. So as long as you apply for forgiveness within those 10 months, and the SBA responds to your forgiveness application so that they fully approved your forgiveness, then they’d pay off the bank and you’re not responsible for any payments.

Jenny Shtipelman (16m 41s):
If between the bank and the SBA, you were approved for partial forgiveness, or if you apply for a partial forgiveness, because you have an, you weren’t able to spend a, all the funds on authorized expenses. And there is a balance between the approved forgiveness and the total loan amount. You have to start making principal and interest payments either the following month after the SBA responds to your forgiveness obligation, or the month after that 10 month grace period. It’s a lot of dates and, and moving things. But essentially let’s say, if you do nothing, you funded your money, your PPP money. 24 weeks is the end of your covered period.

Jenny Shtipelman (17m 23s):
If you then waited 10 months to apply for forgiveness, then you have to start making the principal and interest payments. Now, you can apply for forgiveness during the term of the loan. Even if you start making principal and interest payments, you can then apply for forgiveness. Let’s say the program opened on April 3rd. And so that’s when people started getting funded, right? Their funding dates started from anywhere from April 3rd, through the two iterations of last year’s the PPP loans, probably mid August. And so if you take those that covered period of 24 weeks, that ended for people starting in anywhere in between end of August, beginning of September, through early this year.

Jenny Shtipelman (18m 9s):
So then your 10 month period is starting, right? And so for people who were funded earlier, the 10 month period is running out probably this month or next month. And so this is where the dates are very fluid, depending on when the loan was funded. However, it’s all starting to come up. Another thing to keep in mind is in the very beginning of this program per the SBA rules, that loan term was two years on June 5th. There was a change where any loans booked after that date last year, the loan term was five years. It is up to the borrower in the bank.

Jenny Shtipelman (18m 50s):
If the borrower, let’s say they didn’t get full forgiveness and they wanted to extend from two years to five years, that’s gonna be a decision of the bank, not the SBA, which means, for example, if you were funded in April of 2020, and your loan matures in April of 2022, you now have less than 12 months to number one, apply for forgiveness. But also if your principal and interest payments are starting, depending on the amount of your loan, they’re not gonna be insignificant because your amortization period is rather small.

Charlie Venus (19m 24s):
Thank you, Jenny. And we look forward to chatting with you next week to cover how the loan forgiveness process has changed throughout the many iterations of the PPP.

Edwin K. Morris (19m 34s):
Thanks for listening to this edition of Charlie’s corner, brought to you by Iroquois Group. I am Edwin K. Morris, and I invite you to join us for the next edition of the Trusted Advisor Podcast.

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