DO YOU NEED TO RETURN NOW THE MONEY YOU RECEIVED FROM THE PAYCHECK PROTECTION PROGRAM?
Updated: May 9, 2020
SBA Provides Additional Guidance Regarding the Paycheck Protection Program
The Paycheck Protection Program (PPP) created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was implemented on April 3rd of this year. It authorized $670 billion dollars for qualifying businesses to obtain loans for payroll, benefits, rent, and other authorized expenditures. The Small Business Administration (SBA), in consultation with the Department of the Treasury (Treasury), has been issuing guidance, publishing interim rules and "Frequently Asked Questions" (FAQ) providing more detailed information regarding the program. All this new information from the SBA has raised big issues for many companies that received funds or have been approved to receive them. Recipients of PPP loans must follow new interim rules and FAQs as they are released.
Certifying Your Company's Need for PPP Funds to Support Your Ongoing Obligations
On the PPP loan application, applicants must certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Pursuant to FAQ 31 and 43, Businesses that have already received loan proceeds may reconsider their certifications and return the proceeds through May 14, 2020. This means that any PPP borrower who repays the loan by this date will be deemed to have made the required economic need certification on the loan application in good faith, even if they don't actually qualify. The SBA has stated that it will be providing additional guidance on how it will review the certification prior to the current deadline.
Why Do You Need to Reconsider the Certification?
PPP loan applicants must "tak[e] into account their current business activity and ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business."
There has been a public outcry regarding some businesses that have easy access to other forms of funds but applied for and obtained substantial PPP loans, draining the pot for the smaller business that can't survive without this assistance. For example, BBQ Holdings, the parent of Famous Dave’s of America and Granite City Food & Brewery (both companies received a combined total of 13 million in PPP loans) finished 2019 with revenues of $82.3 million, but will not be returning the money received as they feel certain that, pursuant to the guidance provided by SBA, they can certify with a high level of confidence that they meet the requirements for the PPP loans.
FAQ 39 states that to "further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate..."
Certifications will be scrutinized, specifically reviewing the sources of liquidity available to the borrower. In regards to public companies, new guidance provides that "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." In FAQ 37, the SBA stated that private companies must engage in the same liquidity analysis as large public companies.
Learning from experience, and the unintended consequences that allowed big businesses with easy access to liquid capital to obtain PPP funds, during this second round of funding the SBA has taken additional steps to ensure that smaller companies have a better chance at receiving the PPP loans. The SBA even set aside some hours last week to allow only small lenders to have access to the system to submit and process the applications for smaller loans to the SBA.
What Should You Re-Examine?
At a minimum, review your actual ability to obtain additional capital quickly and to use it to pay wages and benefits. Do you have an available line of credit that does not restrict the use of the funds to other needs? For example you may have a revolving credit line but the funds can only be used to buy equipment or inventory, so it would not qualify as a means to provide the additional capital for the wages. On the other hand, if you have available credit lines which can be accessed to provide the needed capital, you may not qualify for the PPP loan. Finally, does your balance sheet reflect healthy cash reserves that are not restricted?
What Additional Steps Should You Take?
Until further clarifying guidance is issued, borrowers should carefully document the financial impact on their business, keeping detailed summaries and projections as well as comprehensive narratives describing anticipated business operations supporting the need for the PPP loan.
You should review any pending and submitted loan application in view of the recent SBA guidance, the interim rules and the FAQs (collectively the "Guidance"). At a minimum, you may start by doing the following:
Document all management and board meetings considering analysis supporting eligibility, impact of the pandemic on business operations, sources of liquidity available to the business and any discussions regarding the new Guidance, the business' good faith certification, and the possibility of returning the funds.
Review the PPP loan application to ensure that the statements made remain accurate pursuant to the new Guidance. If the facts available to the company between the time of application and now have changed, document this to reflect that there was no intent to mislead the government and that the business acted in good faith under the existing guidelines at the time and based on the information available, and consider if you should return the funds by May 14th.
Document the use of the proceeds from the PPP loan, reflecting disbursement of the funds in accordance with the CARES Act. If possible, open a new bank account to hold and disburse the PPP loan proceeds, also setting up new codes that identify the disbursements to be related to the PPP loan. When you make payments, make payments directly to the intended payee, not through a lump sum transfer to another bank account, in order to maintain the paper trail evidence of the use of the funds.
Check with your payroll department if adjustments will have to be made regarding the last payroll of the eight-week period, so that all direct payroll expenditures related to the PPP loan are separate from other non-qualifying payroll disbursements.
Keep record of your employees, their position, salary, hours/period paid and date of payment. Record any employees that choose not to return to work and consider the impact of not employing a new person in relation to loan forgiveness requirements, as well as the cost of acquiring and training a new employee.
Contact your lender regarding their loan forgiveness process and requirements.
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