What happens if you don’t spend all of your PPP loan? (important forgiveness tips)

In this 7-minute read:

• What happens if I don’t spend my entire PPP loan?
• Can I get a second draw PPP loan if I didn’t spend all of my first PPP loan?
• Can I still get loan forgiveness if I don’t spend all of my loan?
• What are the repayment terms for PPP loans?
• How can I make sure to spend all of my PPP loan funds correctly?

URGENT PPP FORGIVENESS UPDATE: On July 28, 2021, the SBA announced big news (for most PPP borrowers). The SBA has established an online PPP forgiveness platform called the SBA PPP Direct Forgiveness Portal. If your PPP loan was for $150,000 or less, AND if your lender has opted-in to the use of the platform, you will be able to submit your PPP loan forgiveness application online directly to the SBA, using the electronic equivalent of SBA Form 3508S. For full details, read our post about the new SBA PPP Direct Forgiveness Portal and other recent rule changes.

Small and medium-sized businesses (as well as independent contractors, sole proprietors, and self-employed individuals) have without a doubt taken a huge hit throughout the coronavirus pandemic. From statewide shutdowns for “non-essential” businesses to customers and business owners just taking extra precautions to protect themselves and their community, businesses all over the country have suffered financially and many even had to close their doors permanently. 

The Paycheck Protection Program offers relief to those businesses in providing a loan that is intended for payroll and business operations so you can keep your doors open and the nation’s economy can continue turning. Best of all, if you spend the funds as intended, you can apply for loan forgiveness and you won’t have to pay any of it back!

As businesses start receiving their second draw PPP loans, or maybe even have funds left from their first PPP loans, the question of whether they will be able spend all of their loans on approved expenses (or at all) may come into play. We’re here to let you know that if you are in that boat, you have options. 

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What happens if I don’t spend my entire PPP loan?

Not being able to spend your entire PPP loan may seem like a good problem to have, but it can lead to having loans that need to be repaid (with interest) and potential ineligibility for loan forgiveness. 

Realistically, you shouldn’t have received more than you can spend on your PPP loans since you have between 8 and 24 weeks to use those funds, and your maximum potential loan amount should have been calculated based on 2.5 times your average monthly payroll costs (or 3.5 times your monthly payroll costs for qualifying food and accommodations businesses in 2021, for second-draw PPP loans). 

That being said, mistakes can happen. You could receive more than you applied for or maybe some employees have left the company, reducing your payroll expenses. 

This issue tends to come up the most in terms of payroll expenses. You may be able to spend all of your loan easy on operations costs, but in order to receive loan forgiveness, you do need to spend at least 60% of it on payroll expenses. 

So, what are your options? If you can’t spend all of your loan on approved expenses (including 60% on payroll), what can you do?

Option 1: You spend what you can on approved expenses and send back the rest. Make sure that of that total amount that you do spend, at least 60% goes towards payroll. This will help improve your chances of getting the portion that you did spend forgiven. Then you just pay the rest back (there’s no prepayment penalty). Depending on how long it takes you to pay back any remainder, you may be subject to that 1% interest rate on the portion that you sent back, but you won’t have that debt looming over you. 

Option 2: You spend what you can on approved expenses and then use the rest to help with other business expenses. Let’s say you can’t spend 60% of your loan on payroll costs, so you still have a decent portion left over. Use it for other operations expenses. You may still be eligible for partial forgiveness, where 60% of the forgiven portion was used for payroll. Sure, you’ll have to pay back anything that wasn’t forgiven, but you can still utilize those funds to help your business, and 1% is a heck of a nice interest rate on a business loan.

IMPORTANT NOTE: if you couldn’t keep your employees, they quit, or refused to be rehired, you can still qualify for 100% loan forgiveness

For 2021, there are certain exceptions to the “maintaining employees levels and compensation” rule.

If you received a PPP loan of $50,000 or less, you’re exempt

If you received a PPP loan that was $50,000 or less, you are exempt from having to maintain your employee and compensation levels in order to receive loan forgiveness. However, your loan must still be spent on approved costs and you will still need to document that you spent at least 60% of your funds on payroll expenses to qualify for full loan forgiveness.

If an employee quit, retired, or was fired (with just cause), or refused your offer to be rehired

Your loan amount requires that you maintain employment and payroll levels but you couldn’t maintain employee levels due to someone quitting or being fired with just cause, then you can still qualify for full loan forgiveness. You can also get full loan forgiveness if you have written proof that you offered to rehire employees who refused your offer (if your offer was at their former pay). But, it’s very important that you document each of these instances so that you can verify this when you apply for loan forgiveness. 

You’ll need documentation to explain why your employee was fired or other supporting documents to verify an employee’s termination or refusal to be rehired.

Can I get a second draw PPP loan if I didn’t spend all of my first PPP loan?

If you are still working on using up the funds from your first PPP loan, you may still be able to qualify for a second draw loan. You will need to confirm that you have spent, or WILL spend, all of your first PPP loan funds on approved expenses before the funds for your second draw loan come in. If you can’t demonstrate that you will use up the funds from your first loan correctly and fully, then you won’t be eligible to apply for a second draw loan. 

Other second draw PPP loan requirements include:

• You received a previous PPP loan, and 
• You have 300 or fewer employees, and
• Your business must be able to show a revenue reduction of 25% in any quarter of 2020 when compared to 2019

For more information on second draw eligibility, check out our FAQ. 

Can I still get loan forgiveness if I don’t spend all of my PPP loan?

Yes, you can still receive loan forgiveness if you don’t spend all of your first or second draw PPP loan. But you won’t qualify for full loan forgiveness. 

You may still be eligible for partial loan forgiveness, given that you can show that 60% of the forgiven portion goes towards payroll and the other 40% is used on other approved expenses. 

You should still be prepared to pay back the loan in full, because there are not guarantees on loan forgiveness if you can’t use it all on approved costs and meet the requirements set by the SBA. 

What are the repayment terms for PPP loans?

If you find that you are ineligible for full or partial loan forgiveness you will need to pay back at least some of your PPP loan. The terms on repayment are as follows:

• PPP loans have an interest rate of 1%
• If you received your PPP loan prior to June 5, 2020 the loan has a maturity of two years, meaning you have that long to pay it back from the time you make your first payment
• If you received your PPP loan after June 5, 2020, the loan has a maturity of five years
• If you apply for loan forgiveness, your loan payments may be deferred until the SBA remits your forgiveness amount to you (or determines that you are ineligible for forgiveness)
• If you don’t apply for loan forgiveness, your loan payments will be deferred for 10 months after the end of your selected covered period (8 or 24 weeks, depending on your loan)
• No collateral or personal guarantees are required
• The government and lenders are not allowed to charge you any fees for your loan

How can I make sure to spend all of my PPP loan funds?

To ensure that you spend all of your PPP loan funds on approved expenses, it helps to plan it right from the beginning. We recommend utilizing a loan agent or someone who is experienced with helping businesses through the loan application process to make sure that everything is correct and that you understand the terms of the loan and its pending forgiveness.

Before you even apply, or when you receive your approval for the loan and know what that amount will be, you should plan exactly where those funds will go. Planning it out will help you disburse your funds to the appropriate expenses and help you prepare for loan forgiveness. 

You might be interested in this guide: Tracking PPP expenses to maintain forgiveness (tools and tips!) 

Maybe you’ve received your funds already and didn’t have everything planned out as well as you would have liked. You can still make sure to use your remaining funds on approved expenses. You may not qualify for full loan forgiveness, but you can at least use that money to help your business during this time. 

That said, since your loan amount was determined based on 2.5X your average monthly payroll costs, it shouldn’t be difficult to find eligible expenses to use your funds on once you’ve spent at least 60% on payroll.

Approved costs include:

• Payroll (this includes the money you pay yourself)
• Costs related to group healthcare, life, disability, vision, or dental benefits
• Mortgage interest payments
• Rent payments
• Utility payments
• Interest payments on other debts incurred prior to February 15, 202
• Refinancing and SBA EIDL loan made between January 31, 2020 and April 3, 2020
• Covered operations expenses
  • Payments for software that helps with business operations
  • Product or service delivery
  • Processing, payment, or tracking of payroll costs
  • Sales and billing functions
  • Accounting
  • Tracking of supplies, inventory, records, and expenses
• Property damage costs that occurred due to public disturbances in 2020 and were not covered by insurance
• Costs for suppliers
  • Must be essential to business operations at the time which the expenditure is made
  • Is made in accordance with a contract, order, or purchase order that was in effect before the covered period or with respect to perishable goods
• Covered worker protection costs
  • Operating costs to meeting DHHS, CDC, and OSHA guidelines for COVID-19. This may include:
    • Purchasing, maintaining, or renovating your space
      • A drive-through window facility
      • An indoor, outdoor, or combined air or air pressure ventilation or filtration system
      • Physical barriers such as a sneeze guards
      • An expansion of additional indoor, outdoor, or combined business space
      • An onsite or offsite health screening capability
      • Other assets relating to the compliance with the requirements or guidance as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor
    • Purchasing PPE (protective equipment)

It is important that you keep good records of all expenses that you cover with your PPP loan if you want to receive forgiveness on the loan. Keep receipts, invoices, and other documentation that you need in order to verify your expenses.

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