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Q: “Since non-essential businesses in Illinois are closed due to the Governor’s order, how does such a business best utilize the proceeds of a PPP loan?”

Date

May 7, 2020

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3 minutes

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Full Question"Since non-essential businesses in Illinois are closed due to the Governor’s order, how does such a business best utilize the proceeds of a PPP loan? It was funded in mid-April, but employees can’t go back to work yet but are still being paid, now from the PPP proceeds. Is it better for all employees to be furloughed and collect unemployment and then come back to work when the state opens? What impact would that have on having to achieve the 75% threshold for loan forgiveness? Are regular, on-going payments to employees required?"

Answer: We’ve received many questions related to maintaining employee compensation with PPP funds. We broke down the question above, which covers some of the most frequently asked questions on this topic.

  1. Since non-essential businesses in Illinois are closed due to the Governor’s order, how does such a business best utilize the proceeds of a PPP loan?
    • LP Answer: Even where non-essential businesses are closed due to a state’s Governor’s order, PPP funds can still be used to pay employees of those businesses, even if the employees aren’t able to physically (or virtually) be brought back to work. This is a decision each business can make once they’ve received PPP funds – however – 75% of loan funds must be used for payroll expenses
  2. Is it better for all employees to be furloughed and collected unemployment and then come back to work when the state opens? What impact would that have on having to achieve the 75% threshold for loan forgiveness?
    • LP Answer: This is a decision that needs to be made on a case by case basis for each business based on a business’ specific facts and figures. As noted above, at least 75% of loan funds must be used for payroll expenses (both as a general rule and to be eligible for loan forgiveness). If a business lays off employees or decreases employee compensation during the forgiveness period (the eight weeks following receipt of the loan), the amount of loan forgiveness a business is eligible for will be reduced. 
    • As a reminder, the loan forgiveness period only covers the eight weeks following receipt of the loan. Any use of the loan funds after that eight week period are subject to a 1% interest rate and two-year maturity 
  3. Are regular, on-going payments to employees required?
    • Ultimately, the main goal of the PPP loans is to support businesses with maintaining their workforce. Businesses should use loan funds to continue regular payments to employees. In order to be eligible for loan forgiveness, businesses will need to provide adequate documentation that shows how the loan funds were used, including for payroll expenses. Refer again to the note above regarding the requirement that 75% of loan funds be used for payroll costs.
  • Aria D. Eckersley is an Associate in the firm’s Corporate Group. She advises clients on a variety of corporate matters including mergers and acquisitions, contract negotiation and corporate governance matters. Aria has a particular interest in working with female and minority owned businesses, learning about the particular challenges they face and bridging the information gap for new entrepreneurs in competitive industries.

Filed under: Corporate

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