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Art of the Restart Part Two – What Should I do with the PPP Loan (loaded question)?

Update: Recently, Treasury Secretary Steve Mnuchin announced that all businesses receiving Paycheck Protection Plan (“PPP) loans of greater than $2 million will be subject to a “full review of that loan before there is loan forgiveness.”  This review was further described as a “full audit,” though it is not clear what this audit will entail.  However, the Treasury Secretary stated his opinion that the certification “was very clear that if people had other sources of liquidity they could not take this loan.”

What does this mean?  If you look back to the purpose of the CARES Act, it becomes fairly clear: the Act was intended to provide financial support to businesses that have been adversely affected by COVID-19, and as a result, lack the financial resources necessary to support their payroll. In short – job preservation.  Thus, it should also be clear that the federal government is neither “giving money away” nor making low interest loans to businesses that can otherwise afford to maintain their payroll.

Am I the intended recipient of a PPP loan?  Congratulations if you received your funded PPP loan. You have successfully submitted an application that was “approved”, which means that you submitted the required documentation to calculate the amount of the PPP loan that you requested.  This does not mean that you are an intended recipient – see prior point.  Questions you should be asking to determine if your business is an intended recipient include:

  • Based on the facts and circumstances known at the time you applied for the loan, can you prove that you had a reasonable belief that your business was or would be negatively impacted:
    • Did you lose key customers or a significant number of customers, or anticipate that you would?
    • Did you have a valid basis to believe that customers would slow pay or become non-payers?
    • Did you lack access to financial resources to be able to withstand a decline in revenue?
  • Can you prove the facts and circumstances for the first bullet point with written documentation?
  • From the date that you applied for the loan and the date that you received it, has the business improved or declined?

 What if my business was not negatively impacted despite COVID-19 and I received a PPP loan? There are three considerations:

  1. Certification. Every borrower had to certify that “The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations.”  Though the government did not initially provide such a standard, they have now stated that this certification requires the business to take “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.”  If your business improved financially despite COVID-19, and you received a PPP loan, serious consideration needs to be given as to whether the certification was falsely made. A falsely made certification has serious legal repercussions beyond mere repayment of the loan.  The government will ultimately require backup documentation to be submitted that proves the financial impacts that the business allegedly suffered.  Borrowers can anticipate that such documentation may include full financials from 2019 so that current and prior periods can be compared. Things to do:
    • Memorialize in writing the circumstances which constituted “uncertainty” for the business. This can be a memo to a file, board resolution, or a compilation of documentation that supports the circumstances. Preferably all three.
    • Track the business financial performance year over year to demonstrate COVID-19 impact. Document in real time the impacts to the business.
  1. Forgiveness. The purpose of the loan forgiveness is to assist business that lacked the resources to cover their normal levels of payroll during the 8-week period following the loan inception. Much has been written about how to calculate the amount of the loan that may be forgiven, but if you are paying attention, you will note that not much has been written about the qualification for forgiveness as the government has not provided much guidance in that regard. The difference between the two is that the first is a math exercise, and the second is a policy exercise that remains pending. Borrowers should:
    • Maintain the PPP loan proceeds in a separate bank account from all other funds of the company.
    • Fund payroll costs (as defined under the CARES Act) and other permissible expenses directly from the PPP loan account.
    • Do not comingle funds from other sources.
    • Do not operate the business for the purpose of maximizing loan forgiveness. Operate the business as would be prudent under the circumstances.
  1. As is well known by now, any portion of the PPP loans that are not forgiven are to be repaid over a 2-year period, starting 6 months following loan inception.  Coming full circle to the prior two points, a borrower should not assume that if they were not a proper borrower in the first instance that they will have 2 years to repay the loan. If the certification is believed by the government to have been falsely made, the government can require immediate repayment.  Similarly, if the borrower had sufficient resources to maintain payroll, but did have a reasonable basis to apply for the loan in the first instance, then the possibility remains that the government will still require repayment and not permit forgiveness – this is logical if one assumes that the government is not giving away “free money” to businesses that have adequate financial resources. 

The bottom line is that if you cannot justifiably defend the reason for applying for the PPP loan and your business otherwise has adequate financial resources, do not assume that you will receive the full benefits made available under the CARES Act.  Notably, there is no prepayment penalty for paying the funds back early – a good conservative rule of thumb is to consider early repayment if business turns out better than expected during the period of shut-down.  In addition, the government has provided a limited safe harbor period whereby if a business that improperly obtained funds under the PPP returns those funds on or before May 7, the government will deem the initial certification to have been in made good faith, thus effectively eliminating the possibility of an audit or criminal or other sanctions.

To read Part One, click here.
To read Part Three, click here.