Businesses that have taken out loans under the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) have had two ongoing concerns – should they return the loans (because of concerns about eligibility), and what do they need to know about the loan forgiveness process. While there likely will be ongoing confusion and changes to the PPP program, there are two things businesses that take the loans can do to justify their decision both to the general public and to government regulators: don’t change the cadence of your business to qualify for a loan or forgiveness, and document, document, document.
Through May 25, the SBA had issued $511 billion in PPP loans. The program provides cash flow assistance through 100% federally guaranteed loans to companies that maintain their payroll during the coronavirus public health emergency. The loans may be forgiven up to the full principal amount of qualifying loans guaranteed under the PPP.
The PPP requires borrowers to make a good faith certification that their loan is necessary to support their ongoing operations during the currently uncertain economy. The statutory language in the Coronavirus Aid, Relief, and Economic Security (CARES) Act appears to have broad application. Determining eligibility is complicated, however, because the CARES Act offered few guidelines for the loan program. Regulations implementing the program were not issued until the day before banks started taking applications for the loans on April 3.
Since then, the SBA has amended the regulations to state that borrowers with concerns about whether they qualified for the loan and who then repaid it by May 18 will be deemed to have made a good faith certification of economic need. Some companies have repaid the loan funds, either because of public perception (in the case of some public companies) or because they determined after receiving the funds that they were ineligible for the program.
Keep your cadence
Working on the assumption that your business keeps the PPP funds, how should you prepare to make the case for loan forgiveness? Don’t change the cadence of your business or how you gather information solely for the purpose of supporting good faith certification. If the key drivers of your business (cash flow, for example) are uncertain because of the pandemic, either now or at a reasonable time in the future, you can make a good faith case that the PPP loan was needed.
The SBA has also clarified (see Paycheck Protection Program Loans Frequently Asked Questions #46) that any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required good faith certification concerning the necessity of the loan. (Less than 1% of PPP loans have been for $2 million or more; 75% of loans were for amounts of $150,000 or less.)
Business are also concerned about how “adequate sources of liquidity” will be defined by the SBA. A key thing for companies to consider: If your business would be impacted now or through a reasonable future time period, say six months, and if you tapped available liquidity, this will bolster your good faith certification for a PPP loan. A business does not have to exhaust everything (line of credit or cash on hand), but document how, by tapping into your liquidity, you will still be out of funds in eight weeks.
Document, document, document
Companies need to go through a robust and comprehensive analysis of each good faith certification – why they needed the PPP loan and how they used it correctly to qualify for forgiveness. This analysis should include documentation of discussions with the board of directors or owners’ group. The analysis should demonstrate that the company made the decision to get a PPP loan based on the normal course of business, as impacted by the economic slowdown. If you change the cadence of your business to justify qualification for a government program, you will more likely be on the defensive when asked by a government agency why you needed the loan.
Businesses that received loans should be using some form of calculation to estimate what their forgiveness amount will be. Companies must demonstrate they used funds as required – 75% on payroll, and 25% on other expenses.
If you are still confused about how the Treasury Department and SBA will view your reasons for taking loan, spend it appropriately as best you can. If it doesn’t get forgiven, it converts to a 1% loan that you can repay over two years.
On May 15, the SBA released the Paycheck Protection Program (PPP) loan forgiveness application with new rules and guidance for business owners and not-for-profits. Organizations must complete this form to apply for forgiveness of their PPP loan. Watch this Baker Tilly webinar for an overview of the application form along with some insights and takeaways from our PPP loan specialists.
Other PPP resources
The PPP program has evolved since March and further changes are possible. Both the House and Senate are considering legislation to modify the PPP, including:
- Extending the current eight-week period during which businesses must use funds to have loans forgiven to 24 weeks or Dec. 31, whichever comes sooner
- Allowing businesses to repay loans over five years instead of two
- Revising the rule that no more than 25% of proceeds can be spent on expenses
- Extending the deadline to apply for a loan from June 30 to the end of 2020
Businesses should pay attention to the Treasury Department’s Paycheck Protection Program Loans Frequently Asked Questions website, with the understanding that other more formal guidance may be issued in the form of rules and regulations.