DID YOU REVIEW YOUR CURRENT LOAN DOCUMENTS BEFORE OBTAINING A PAYCHECK PROTECTION LOAN?
Updated: May 21
A Paycheck Protection Loan (PPP) is a loan administered by the Small Business Administration (SBA) that provides a direct incentive for qualifying small businesses to keep their workers on the payroll during the Coronavirus (COVID-19) crisis. Small business can apply through any paticipating SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution.
Even though in these moments of crisis, a PPP may be the only option available to a business, the loan itself may have some unintended consequences if the business already has commercial loans with some standard provisions. This article only mentions a few examples to provide you some guidance, but you should have your attorney review your loan documents and if any provision is of concern, you must discuss it with your lender as soon as possible.
Borrowers must review their existing loan documents to:
Ensure that the stimulus loan is permitted under their loan documents as many generally prohibit the borrower from incurring additional debt, especially debt owed to another lender.
Examine how the stimulus loan will affect the financial covenant calculations on the existing loan documents. For example, in a leverage ratio the numerator (debt) may need to exclude the amount of the stimulus loan or else the calculation would be inflated; in a fixed charge coverage ratio, the denominator (fixed charges) might be increased due to the interest payments on the stimulus loan. The borrower and the lender should discuss these effects and amend the financial covenants to remove any undesired impact of the stimulus loan.
See if the security documents include a boilerplate dragnet clause whereby all future debt from the borrower to the secured lender, not just the debt under the existing credit facility, is secured by the collateral. PPP loans are required to be unsecured and it may inadvertently become secured by this dragnet clause if your existing lender provides you the PPP loan. If your loan documents contain a dragnet clause, the PPP loan would need to be carved out from the obligations that are secured by the collateral, requiring an amendment to the existing credit agreement.
Ensure that it does not require that the net cash proceeds of any debt incurred outside of the existing facility be used to pay down the outstanding loans.
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