Dear Clients and Friends,
At this point, many of you have either received your PPP loan proceeds or expect to receive the loan proceeds very soon and are now turning your attention to utilizing the loan and maximizing forgiveness. However, in light of some recent guidance from the Treasury, all companies and organizations that have applied and received PPP loans will need to reexamine the basis of their certification pertaining to the necessity of the loan.
As a reminder, all PPP applicants are required to certify in good faith that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” While this is broad and open to interpretation, the CARES Act expressly states that the normal “availability of credit elsewhere” requirement for Small Business Administration (SBA) loans “shall not apply” to the PPP loans. As such, for those of you that applied, you concluded that there is enough uncertainty with your business that warrants the certification.
Why Reexamine Certification?
As previously communicated, in response to negative publicity associated with large publicly traded companies, such as Ruth’s Chris Steakhouse and Shake Shack, taking PPP loans, the Treasury updated its FAQ (FAQ 31) to address a borrower’s “good faith certification” that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In its response to the question, the Treasury stated that “businesses owned by large companies with adequate source of liquidity” would likely be deemed unable to make this certification in good faith.
Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking 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. For example, 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. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance, and repays the loan in full by May 7, 2020, will be deemed by SBA to have made the required certification in good faith.
In addition, last week, the Treasury updated its FAQ (FAQ 37), which implies that the guidance prescribed in FAQ 31, applied to all companies, public or private.
Finally, Treasury Secretary Mnuchin announced last week that the SBA will be performing an audit of all PPP loans over $2 million, as well as, a representative sample of loans below that threshold.
It is our opinion, which is shared by the AICPA and various law firms that we have spoken with, that this guidance conflicts with the language in the original CARES Act, in that “during the covered period, the requirement that a small business concern is unable to obtain credit elsewhere . . . shall not apply to a covered loan.” Unfortunately, in their haste to stimulate the economy and keep employees working, the government made quick decisions on eligibility and rules and now they are changing some of the rules as we go.
That said, absent further guidance from either the Treasury or SBA, we strongly recommend that applicants reexamine the basis of your certification pertaining to the necessity of the loan.
What to Do?
As we have previously communicated, it is important to document the business’s position that the PPP loan is needed should its purpose ever come into question. This documentation should include a written quantitative and qualitative analysis of the current situation of your business. This could include a narrative as well as financial forecasts. You should be as specific as possible, using KPIs and other data. Some examples of what to include:
- Closing or restricting operations due to local government orders;
- Negative impacts to the marketing pipeline (provide the % it has declined);
- Decline in revenue (provide the dollar amount and/or percentage change);
- Decreased backlog;
- Customers opting to delay orders or service;
- Increased accounts receivable and/or decreasing incoming cash flow due to customers’ inability to pay;
- Supply chain issues;
- Competitors and industry/trade groups are forecasting difficulty and we think we might be next; and,
- Layoffs of employees or reduced wages would be the most likely result if you do not receive the PPP loan.
This list is not all-inclusive, but rather questions companies should begin answering internally and documenting. Some of these questions will not apply to your company, but others not listed may be more applicable. Your documentation will be specific to your situation.
Given the recent guidance from the Treasury, the analysis should also include what access you have to liquidity (debt or capital). Even if a business does have a cash reserve or a line of credit, consideration should be given as to whether it would be enough to get your business through the current negative impact. If your business uses its entire cash reserve and line of credit to keep the business going in the next two months, what is likely to happen to your business if another economic shutdown occurs because of a rise in COVID-19 infections this summer, or during the fall and winter months? The analysis should also give a general overview of your business’s use of funds and general strategy related to the PPP loan.
In addition, we suggest you talk with your attorney to seek their advice in determining whether this analysis and written documentation should become part of your corporate records, potentially with a corporate resolution documented by corporate minutes. By writing the story now, when it’s fresh in everyone’s mind, clients will be in a better position if the SBA comes back during the forgiveness phase or two years later to ask questions.
Finally, as part of the reexamination process, consider the reputational risk, as the name of the borrowers and the PPP loans amounts are public information. Even if you confirm your comfort with your business’s rationale for applying for the PPP loan, be prepared to answer questions from stakeholders (customers, vendors) as well of the media regarding the business’s need for the loan.
If you have taken the loan funds and now are not comfortable with the certification, you have until May 7, 2020 to return the loan funds. The SBA will consider this repayment as appropriate certification.
Please contact us with any questions.