The Payroll Protection Program (PPP) loans are top of mind for most leaders and owners of small businesses.
Recently the headlines that feature PPP have been about high-profile companies receiving large PPP loans. Many are questioning the appropriateness and need for the companies receiving these loans. Those who are considering applying for the second round of these loans are wondering if they should apply. Even those that have already received loans are reconsidering whether to retain the loans. What risks we are taking in applying for and receiving these loans? Do we even qualify for a loan? How do we prove we qualified for the loan when we applied?
The PPP was designed to provide eligible small businesses immediate relief if they believed that the “current economic uncertainty” of the COVID-19 pandemic made this loan “necessary to support their ongoing operations”. Businesses also need to be willing to certify to the lender that the loan is in fact needed. The intent of the program is to reduce unemployment, help small businesses retain employees, and enable them to rebound quickly once the pandemic is under control.
Unfortunately, the initial guidance received from the Small Business Administration (SBA) did not provide any definition or specifics regarding the nature or extent of the required impact to operations or the “current economic uncertainty” that would make the loan request “necessary to support ongoing operations.”
On April 23, 2020, the SBA added FAQ #31 (reproduced below) to its list of FAQs for Paycheck Protection Program Loans. It seems this FAQ aims to provide clarity regarding the program qualifications specific to determining “necessity” of the loan for funding “current operations. Any business that received a PPP loan prior to the issuance of this new guidance that now believes that they do NOT meet the required “necessity” for the loan, can repay the loan in full by May 7, 2020. Any business that does so will be deemed by the SBA to have made the required good faith certification on their PPP loan application.
In addition, on April 28, CNBC reported that Treasury Secretary Steven Mnuchin told CNBC that the government will audit any company taking out more than $2 million from the small business loan program.
The risks to companies and individuals receiving PPP funds who did not qualify to receive the funds or do not use the funds for qualified purposes could be significant, including civil and criminal penalties.
One key issue for each business applying for a PPP loan to consider is the required certification – that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This is the sole subject of the remainder of this document.
Prior to an analysis of FAQ 31 and the key terms, below are recommendations for those applying for or receiving PPP loans. Your internal documentation package for your process in applying for your PPP loan should include:
- A thorough discussion of your evaluation of the economic uncertainty facing your organization due to the COVID-19 pandemic, potential effects on your revenue and operations, and potential effects on your expenses.
- A discussion and quantification of the sources available to your organization for liquidity in navigating the pandemic and maintaining current operations.
- Planning projections for cash flow and financials in navigating the pandemic – with multiple scenarios, e.g. assuming no change in personnel and contemplating the effects on revenue and expenses, and an alternative scenario with actions that would have to be taken to address the negative effects. These planning projections should include a list of each key assumption and the reasons for the assumptions.
- Personnel scenarios and history – Full-Time Equivalents, FTEs in 2019, January 2020, February 2020, and your original plan for 2020. Then what the level of your FTEs could be over the remaining months of 2020 (and into 2021 possibly) if you change operations to address the economic uncertainty of the pandemic.
- A clearly stated analysis of the impacts of the economic uncertainty on your organization.
- A clearly stated conclusion of the magnitude of the potential impacts on your organization, the significance of the described impacts to your organization (personnel, facilities, rent, etc.), and a conclusion as to the need for the PPP loan to support your ongoing operations. It may also be a good idea to describe and quantify what it will allow your organization to do that it would not otherwise have done.
The above should be assembled before applying for your PPP loan. In the event you considered all the above, and then applied for your loan without assembling the documentation, you should prepare the formal documentation now. This will ensure that you have good, relatively contemporaneous, support for why you applied and that you appropriately signed the certification.
Now, on to some analysis of the terms, acknowledging that this analysis is not a legal analysis, and that there are many unknowns. In addition, please know that everything associated with the CARES Act and the PPP is a moving target and that this document is based upon interpretation of the rules and other information available as of April 29, 2020.
FAQ 31 starts with the question:
“Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”
On first impression, you could conclude this doesn’t apply to you; your company is owned by individuals and it’s not a large company. Then you may start down the rabbit hole of more questions. What are large companies? What are adequate sources of liquidity? The reality of FAQ 31 is that there are a lot of questions to explore as you try to apply it to your situation. Let’s explore some of these terms.
Large companies – The PPP is aimed at small businesses. Hence, its qualification requirement of less than 500 employees. If your organization employs less than 500 employees, it meets the requirement. This appears to be the definition of “small.”
Businesses owned by large companies – The answer in FAQ 31 includes “…, all borrowers must assess their economic need for a PPP loan under the standard established…” in the first sentence. The “all borrowers” is much broader than “businesses owned by large companies.”
Adequate sources of liquidity to support ongoing operations – FAQ 31 provides some guidance stating “… taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith…”
Ongoing operations – This probably means operating as the organization operated before knowing about the pandemic, such as in January 2020.
Sources of Liquidity – Capital from investors, bank loans, lines of credit, etc.
Not Significantly Detrimental – “Significant” is not defined. In a recent discussion, Stephen Stern, Esq. of Kagan Stern commented that in some commercial damages cases, 5% has been considered significant. In any business, reductions in gross revenue and the associated reductions in net income are detrimental to the entity’s market value. In addition, increases in debt reduce the value of the business. Finally, obtaining capital from private equity and other investors, if it is even available, dilutes the current ownership.
Make sure you have your documentation assembled to meet the requirements for the certification. Do not let this wait.
Also, please note that other documentation will be critical as you expend the proceeds of your PPP loan through the eight-week period beginning on the date of initial funding of your loan. There are many considerations to be addressed in computing and documenting your potential forgiveness amount.
Your HeimLantz team of CPAs and advisors is available to assist you with assembling the documentation for your application and for computing and supporting your forgiveness request.
SBA Paycheck Protection Program Loans Frequently Asked Questions (FAQs)
Question 31: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.