Banking on forgiveness of your Paycheck Protection Program (PPP) loan, that may not be your biggest problem…. remember the certifications in your PPP loan application?
The SBA has decided that it will review all loans in excess of $2 million as well as other loans as the SBA deems appropriate. PPP loan applicants were required to make several certifications in their applications including a certification that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” There is limited guidance on what is required for this certification. What is the liability for a false certification? How does a borrower document its need for the loan to support its ongoing operations?
The PPP FAQ’s state that borrowers should “tak[e] into account their current business activity and 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 public companies, the SBA guidance provides that “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.”
Additionally, the SBA has suggested that private companies must engage in the same liquidity analysis as large public companies. Based on the current limited knowledge regarding what the certification will actually look like, borrowers should contemporaneously document their need for the funds and be prepared to demonstrate that need to the SBA.
A new PPP FAQ provides a safe harbor for certain PPP loans. Borrowers with loans with principal amounts less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. The SBA has determined that this safe harbor is appropriate as borrowers with loans below the $2 million threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment.
Most small business owners are expecting full forgiveness of amounts spent within the first 8 weeks of the closing of the loan. It is important to remember that only 25 percent of the loan money is allowed for rent, utilities and other overhead. This is difficult as some businesses are still waiting to reopen or reopening at reduced capacity and are facing depressed sales even once they reopen. This all leads to reduced payroll, some of which may be due to reduced sales but also due to workers opting for state and federal unemployment insurance benefits instead of returning to work. Many PPP loans may actually be more than a borrower requires at this time to support operations, especially if a borrower initially furloughed employees and those employees have yet to return to work. Additionally, if the SBA determines that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan, the borrower will not be eligible for loan forgiveness.
Other recent and interesting PPP loan guidance relates to the disbursements of the loan proceeds. To prevent borrowers from extending the eight-week covered period for PPP loan forgiveness, lenders are required to make a one-time full disbursement of the loan proceeds within 10 calendar days of loan approval and lenders are required to cancel loans that haven’t been disbursed within 20 calendar days of loan approval. Lenders are not responsible for delays in disbursements when those delays are due to a borrower’s failure to provide any required loan documentation.
Guidance relating to the program has been continually changing and will probably continue to do so. Borrowers should reach out to their lenders and advisors to keep up to date on the regulations and the PPP.