SBA Loan Forgiveness for PPP, EIDL and 7(a) Loans

Paycheck Protection Program loans

The Paycheck Protection Program (PPP) was an SBA-loan program offered during the pandemic. PPP loans were designed to be disbursed through nearly 5,500 lenders across the country. The purpose of this loan was to provide a way for small businesses to keep workers on their payroll and avoid laying people off. 

PPP loans were available up to $10 million. The amount that you were eligible for depended on how much your business ran in payroll.

For instance, sole proprietors were only allowed to take 2.5 months’ salary with a $100K income cap. So regardless of how much an employee earned, you could pay them only for 2.5 months of salary as if they were making $100K.

PPP loans were essentially interest-free at a 1 percent interest rate. Initially, these were two-year loans, but eventually, they were turned into five-year loans, depending on when your loan was approved. There was no collateral required and they didn’t require a personal guarantee. These loans are 100 percent forgivable if the employee retention criteria were met and the funds were used for eligible expenses. 

The Paycheck Protection Program ended on May 31, 2021. If you’re an existing borrower, you may be eligible for loan forgiveness, which you can apply for until the loan’s maturity date.

Economic Injury Disaster loans

Economic Injury Disaster Loans (EIDLs) are different from PPP loans. The purpose of the EIDL is to satisfy financial obligations and operating expenses that could have been met had the disaster not occurred. For example, if you owned a restaurant, and your business got shut down due to your state’s COVID restrictions, an EIDL potentially could help you cover things like rent and working capital.

While the SBA stopped accepting applications for new COVID-19 EIDLs on Jan.1, 2022, and ceased loan increase requests and reconsiderations for declined applications as of May 6, 2022, you can still apply for a non-Covid EIDL relief loan. The rates on these are up to 4 percent. 

The unusual thing about the EIDL, relative to other types of SBA loans, is that it comes with a 30-year repayment term. Having an additional 20 years to repay debt would make the payments relatively low, especially with the low interest rate.

Differences from the PPP loan

If you took out an EIDL, collateral is required for any loan over $25,000. If you own a restaurant and took out a $50,000 EIDL, for example, you would be required to pledge your business assets as collateral. 

Another important difference is that if your EIDL exceeds $200,000, you would be required to personally guarantee it. If your business closes next week, you’re personally liable for the debt.

EIDLs are not forgivable. You’ll repay them over the 30-year term, though you can pay your loan off early with no prepayment penalties. 

Did you know? EIDL loans are not forgivable and will be repaid over a 30-year term.

SBA ‘Offer In Compromise’ basics

The OIC process typically applies to SBA 7(a), Express and 504 loans. Disaster loans have an OIC process, but it’s handled by a different SBA office. This section speaks to the most popular SBA loan — the 7(a).

In order to get an OIC approved, the SBA requires you to prove that you’re experiencing financial hardship and a lack of ability to repay your loan. This means you don’t have the funds to pay them back fully, and can only afford to pay them a portion. 

For your business to be eligible for a settlement, the business itself needs to cease operations. This means that you’re no longer accepting clients or producing products. It’s OK if you collect on some final receivables or complete some projects prior to your offer in compromise, but the business can’t continue to operate. 

The OIC typically is for the guarantor only (unless you specifically make a separate offer for the business entity). If your OIC is accepted, the legal entity that owns your business would still be liable for the debt. So, in that respect, the debt is not actually being completely forgiven – instead, the guarantor is simply being released in exchange for a cash payment.

Submission of an OIC is much more involved in terms of paperwork than requesting forgiveness through a PPP loan. You’ll need to provide a personal financial statement, tax returns, pay stubs and bank statements to prove that you cannot afford to pay this debt in full.

Another difference between the OIC and the PPP loan is that the OIC must be reviewed and recommended by your original lender before it gets sent to the SBA. If your lender doesn’t agree to the terms that you’re offering, it will not be presented to the SBA. 

Contrast that with a PPP loan, where all you had to do was submit your application to the lender. They may have vetted it for completeness, but then it was forwarded to the SBA. Small PPP loans had a short form that you needed to complete when applying for forgiveness.

Lenders are going to look at PPP loan forgiveness much differently than the SBA OIC. The reason for this is that PPP loans are 100 percent reimbursed by the SBA, whereas SBA 7(a) loans are typically 75 percent reimbursed. 

This means that the bank will be taking a 25 percent loss on any amount that’s forgiven through the OIC program. As a result, the bank has a financial stake in making the decision and will evaluate the loan much more critically than the PPP loan.

Frequently Asked Questions

What can EIDL funds be used for? And how is it different from PPP?

EIDLs can be used to cover working capital or normal operating expenses, such as healthcare, benefits, rent utilities and even debt payments. Contrast that with the PPP, where the loan proceeds had to be used for eligible payroll costs. This is why the loan is forgivable — it’s not intended to pay business expenses. It was intended to keep people employed and not on unemployment.

Who’s eligible for EIDLs?

You have to be located in the United States and have 500 or fewer employees or independent contractors.

Businesses that engage in illegal activities, loan packaging, speculation, gambling, investments or lending are not eligible for EIDLs. 

Is SBA loan forgiveness for PPP loans the same as an SBA Offer In Compromise for SBA 7(a) loans?

Loan forgiveness for PPP loans is not the same thing as an SBA Offer In Compromise. If you receive loan forgiveness on a PPP loan, you’ll receive 100 percent forgiveness. The OIC only forgives a portion of the debt if the SBA approves it. 

The PPP loan was always intended to be forgiven. The purpose of the PPP was to give money to business owners so their employees didn’t have to go on unemployment. Asking for this forgiveness is not breaking any prior arrangement or expectation of repayment of these loans.

Contrast that with an SBA 7(a) loan. Whenever a borrower takes an SBA 7(a) loan, it’s always expected and agreed that they will repay it in full with interest over a particular period of time, which is typically 10 years. And that’s why you’ll only receive partial forgiveness even if your SBA OIC is approved. 

Will there be another round of PPP loans?

No, the program ended on May 31, 2021.

What about taxes?

The PPP loan is not a taxable loan and if your loan is forgiven, it isn’t considered taxable income. However, if the IRS discovers the loan funds were improperly forgiven, they may be subject to taxes. And if you receive partial forgiveness on a 7(a) loan, you will receive a 1099-C and the funds will be treated as taxable income. 

What is the likelihood of being approved for a PPP loan forgiveness versus a 7(a) loan?

As long as you prove that the PPP funds were used for the correct purpose, you don’t have to prove any level of financial hardship in order to have it forgiven. So it’s easier to have your PPP loan forgiven than a 7(a) loan.

In contrast, an OIC for a 7(a) requires approval by both the bank and the SBA. And those decisions are fairly subjective because the reviewer of the OIC needs to determine if the borrower has experienced significant enough financial hardship that renders them unable to pay. So it’s far more likely that your SBA OIC would be rejected, while PPP loan forgiveness should be easier to achieve.

Will there be a forgiveness process similar to an OIC for EIDLs?

Historically, disaster loans have been serviced in different offices than 7(a) loans, and the former can be difficult to settle. Assuming that these EIDLs are going to be serviced in disaster loan servicing centers, it’s likely there will be an OIC process for them, but it may be far harder to settle than a 7(a) loan.

Additional reporting by Jason Milleisen.