The Paycheck Protection Program (PPP) has provided critical support to small businesses across the nation. Many businesses have been able to appropriately modify and maintain operations, keep their employees on payroll and receiving benefits, and make plans for the future, even in times of economic uncertainty.
“Since the launch of PPP on April 3, [the] SBA has processed over 3.8 million loans for more than half a trillion dollars of economic support in less than one month,” stated SBA Administrator, Jovita Carranza, and Secretary, Steven T. Mnuchin, in their joint statement made on May 3rd.
As an essential and successful part of the relief provided through the CARES Act, the PPP has been in media headlines since its onset. However, some recent publicity surrounding the program has been on public scrutiny, with news of larger publicly traded companies with access to alternative sources of capital receiving loans, in spite of their certifications of good faith regarding “economic need” when applying.
The SBA Administrator and Secretary’s joint statement made on April 28th confirms the SBA has “noted the large number of companies that have appropriately reevaluated their need for PPP loans and promptly repaid loan funds in response to SBA guidance reminding all borrowers of an important certification required to obtain a PPP loan.” The statement continues in stating, “To further ensure PPP loans are limited to eligible borrowers, 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, following the lender’s submission of the borrower’s loan forgiveness application”
Full details on these issues may also be found in the latest PPP Interim Final Rule, also issued on April 28th. In addition, The U.S. Department of Treasury has also made additions to their PPP Loans Frequently Asked Questions Document, addressing these matters.
Specifically, PPP FAQ #31 asks, “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The answer directs the reader back to the CARES Act legislation that states that, at the time of application, applicants must make a certification of good faith, stating “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient,” acknowledging “that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments,” and certifying you are not already receiving PPP funding. The full listing of certifications may be found on page 2 of the PPP Borrower Application Form.
Additionally, PPP FAQ #37 asks “Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?” The reader is directed back to the answer for FAQ #31, so the guidelines are the same for both large companies and businesses owned by private companies.
PPP FAQ #39 asks, “Will SBA review individual PPP loan files?” Again, the SBA reminds borrowers of the required certification of good faith, and explains that, following the lender’s submission of the borrower’s loan application, the SBA will “review all loans in excess of $2 million, in addition to other loans as appropriate.”
What does this mean for existing and prospective borrowers?
Whether you agree with the Treasury and SBA or not, this new guidance means reevaluation of your loan need is necessary. Whether you’re considering applying for a PPP loan, or considering keeping or repaying funds already borrowed, you should prepare for scrutiny from the SBA.
That being said, the new guidance does not mean borrowers should be fearful. In general, most businesses that received PPP funding have done so due to true economic need and did make their certifications in good faith. This new guidance was issued in response to the actions of a very limited number of borrowers, and the loan scrutiny to follow is a precautionary measure to prevent further issues.
If you submitted your application before April 23rd and have already received funding, we encourage you to revisit your application and the certification of good faith within. Think about your certifications made in terms of your financial situation at the time you applied for and received the loan proceeds.
SBA scrutiny essentially means there will be audits. Although the SBA pointed out companies with loans in excess of $2 million would be audited, there could be a trickle-down effect to smaller companies. A reassessment of your loan needs and certifications made can help your company avoid potential penalties, should it be determined your certification was not made in good faith.
What should I consider when reassessing my need for PPP funds?
A number of factors should be considered in terms of business conditions at the time of PPP application and with respect to your projected ability to maintain operations, as well as any associated uncertainties. If your financial standing or outlook has changed significantly since the time of your application, this doesn’t automatically mean your funds need to be returned. No one can say for certain that the economy doesn’t still have significant risk. It’s simply prudent to examine the economic risks at the time you applied for your loan, current economic risks, as well as the outlook for the future in order to defend your original certification and economic need in case your loan is audited. See the ARB Resources section of this article for additional tools to help your business assess some of the business conditions outlined below.
Negative business impacts – Negative business impacts vary by industry and by individual company, but these would include impacts due to things such as a reduction in communications and interactions with customers, recent decreases in job performance due to mandatory health and safety precautions, supply chain issues, remote working communication barriers, increased costs for remote networking and home-use technology and hardware, and reductions in workforce. Impacts based on projections should be considered, such as your ability to maintain payroll and issues surrounding re-hiring employees.
Cash flow & liquidity – Take a look at cash and receivables on hand to assess whether you can continue to meet operating expenses, such as wages, employee benefits, rent, and utility expenses, and for how long. Assess for other sources of capital and how quickly those sources may be accessed. According to the new guidance, companies should determine if other sources of liquidity are available, as long as it would not be “significantly detrimental to the business.”
Geographic region & industry – The PPP’s original intent was to help with certain business operating costs during the COVID-19 crisis. Obviously, those regions instituting stay-at-home orders earlier and keeping them in place longer are impacted differently than regions where these orders have already been lifted. It also remains to be seen, however, what impact lifting these orders early will have on the future of these economies. Regardless, operations issues surrounding stay-at-home orders should be addressed by your business.
Industries are also affected differently. Industries without government-mandated shutdowns, for example, could be considered less affected. It’s a good idea to assess your peers, competition, and other economic factors in your industry. In some cases, they can be a gauge for appropriate reactions and measures.
What happens after reevaluating my certification of good faith?
Reevaluating your certification of good faith should tell you one of two things:
- You anticipated needing funding and DID NOT, or NO LONGER, need the PPP funds
- You DID, and still DO, need the PPP funds
Should you find your company is not comfortable with the initial certification of good faith, or is no longer in need of PPP proceeds, there is a safe harbor in place for funds to be fully repaid before May 14, 2020, with no penalty and no revocation of your certification being made in good faith. The SBA says guidance on partial repayment is forthcoming.
Should you find your company is still in need of PPP proceeds, we recommend fully and formally documenting a COVID-19 Payroll Protection Program Needs Narrative, which should include all factors supporting your loan needs ahead of any potential SBA loan scrutiny. We have included an industry-specific example of this documentation in the ARB Resources section below. It’s also good practice to keep a detailed record of supporting documents attached to your needs narrative, including relevant items such as canceled checks, receipts, payroll reports, leases, utility bills, and documentation on wage changes, as well as copies of your financial forecasts, projections, cash flow analysis, and relevant industry-specific statistics.
Contact us if your company needs assistance preparing a needs narrative specific to your industry and company needs
Download our 13-Week Cash Flow Analysis Worksheet. This tool, designed specifically to target the liquidity needs of small businesses, can assist your business with projecting cash flow, forecasting for deficits, managing shortfalls, assessing liquidity needs, and determining your ability and need to borrow.
We also encourage you to take a look at our article that explains our PPP Loan Forgiveness Workbook. It’s a planning tool we have made available for businesses considering a PPP loan to use to calculate the estimated forgivable portion.
We’re here to help
ARB is dedicated to updating our clients and community as the legislative implications of the COVID-19 pandemic continue to unfold. For questions on these updates, contact us today, or visit our COVID-19 Financial Resource and Tax Center for additional information on related matters.
by David Jean, CPA, CCIFP, CExP