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

PPP loans and forgiveness

The PPP was an SBA loan program offered during the pandemic. PPP loans were disbursed through nearly 5,500 lenders across the country to help small businesses keep workers on their payroll and avoid layoffs. This program ended on May 31, 2021. 

How PPP loans worked

PPP loans were available for up to $10 million, with eligibility based on total payroll liabilities, including wages, salaries and employee benefits.

For instance, sole proprietors could receive 2.5 months’ worth of their net income, capped at an annualized $100,000 income limit. This meant that regardless of how much a business owner earned, PPP funds could only cover 2.5 months of income as if their annual salary were $100,000.

PPP loans had a low 1 percent fixed interest rate, making them effectively interest-free for many borrowers. Initially, these were two-year loans, but those approved after June 5, 2020, had a five-year repayment term.

PPP loan forgiveness

Sally Graham, a former public affairs specialist with the SBA, confirmed that PPP loans are the only SBA loan eligible for forgiveness. “Current law only authorizes SBA to offer loan forgiveness on Paycheck Protection Program loans,” Graham explained. “COVID-19 EIDLs must be repaid.”

Existing PPP borrowers can apply for forgiveness anytime up to five years from the date the SBA issued the SBA loan number. The SBA has a direct forgiveness portal where you can apply and that process can take as little as 15 minutes.

EIDLs

EIDLs help small businesses affected by a disaster cover overhead costs and operating expenses. 

COVID-19 EIDLs vs. traditional EIDLs

• COVID-19 EIDLs: The SBA created the COVID-19 EIDL program to help small businesses survive the financial hardships of the pandemic and cover essential costs. These loans specifically addressed pandemic-related economic disruptions.
• Traditional EIDLs: Traditional EIDL loans assist businesses recovering from natural disasters like hurricanes, wildfires or floods. 

The SBA stopped accepting applications for COVID-19 EIDLs on Jan. 1, 2022, and ceased loan increase requests and reconsiderations for declined applications on May 6, 2022. However, businesses can still apply for traditional (non-COVID) EIDL loans, which have interest rates of up to 4 percent.

How EIDL loans work

One unique feature of EIDL loans — compared to other SBA loans — is their 30-year repayment term. The longer repayment period reduces monthly payments, especially given EIDL’s low interest rates.

For EIDL loans over $25,000, collateral is required. For example, if a restaurant took out a $50,000 EIDL loan, the business would need to pledge assets as collateral.

For EIDL loans over $200,000, a personal guarantee is required. This means if your business closes, you remain personally liable for the debt.

No EIDL forgiveness

Whether COVID-related or traditional, EIDL loans are not forgivable. Borrowers must repay them over 30 years, but there are no prepayment penalties for paying them off early. 

Graham cautioned borrowers to beware of scams promising forgiveness for SBA EIDL loans. “Borrowers should be cautious of scams and phishing attempts that request money for SBA’s free assistance or purport to offer forgiveness for other SBA products, grants or loans,” Graham warned.

Although EIDL loans cannot be forgiven, the SBA offers a hardship assistance option for borrowers struggling with repayment.

EIDL Hardship Accommodation Plan (HAP)

The SBA’s HAP provides temporary relief for EIDL borrowers facing financial difficulties.

“[In February of 2024], the SBA expanded eligibility for the Hardship Accommodation Plan,” explained Mark Valentino, head of business banking at Citizens Bank. “This is one option for those with outstanding [EIDL] loans who are unable to meet their loan payments.”

Borrowers eligible for this plan may reduce their payments to 10 percent of the usual amount for six months — without needing to catch up on missed payments first. This plan can be renewed once after expiration. However, interest continues to accrue, which can increase the final balloon payment at the end of the loan term.

Valentino urges borrowers to proactively work with their lenders if they run into repayment challenges.

“Work with your lender before defaulting to avoid the seizure of assets and collateral,” Valentino advised. “Seek support from your financial advisor, banking institution, and/or a lawyer with experience in this space.” 

SBA Offer in Compromise (OIC) basics

Other SBA loans, including 7(a), Express and 504 loans, do not offer forgiveness. However, if you’re facing financial hardship, you may be able to work out an OIC with the SBA.

Pursuing an OIC should be a last resort, as it has stringent requirements far more punitive than PPP forgiveness. To qualify, you must meet the following criteria:

• Financial hardship: You must prove you cannot repay your loan fully and can only afford to pay a portion of the debt. 
• Collateral liquidation: You can only submit an OIC request after all collateral has been liquidated.
• Closed business: Your business must have ceased operations — you can no longer accept clients or produce products. However, you may collect final receivables or complete outstanding projects before submitting an OIC request, as long as the business is not actively operating. 

The OIC typically applies only to the guarantor (unless a separate offer is made for the business entity). If your OIC is accepted, the legal business entity remains liable for the debt, meaning the debt is not fully forgiven. Instead, the guarantor is released from liability in exchange for a lump-sum cash payment.

PPP forgiveness vs. an OIC

Obtaining an OIC for an SBA loan is very different from pursuing PPP loan forgiveness. Here’s how:

• Extensive paperwork: Submitting an OIC requires significantly more documentation than applying for PPP loan forgiveness. You must provide a personal financial statement, tax returns, pay stubs and bank statements to prove you cannot afford to pay the debt in full.
• Review process: Unlike PPP forgiveness, which only requires submitting a short application to the lender, an OIC must first be reviewed and recommended by the original lender before being sent to the SBA. If the lender does not agree to the borrower’s proposed terms, the OIC will not be forwarded to the SBA for approval. 
• Stringent criteria: Lenders treat PPP forgiveness and SBA OIC requests very differently. PPP loans are 100 percent reimbursed by the SBA, whereas SBA 7(a) loans are typically 75 percent reimbursed. This means the bank will take a 25 percent loss on any amount 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.

Matt Sexton contributed to this article.