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PPP loans: Risk management suggestions
By Phil Stanton
Faced with unprecedented economic stress from the COVID-19 pandemic, shelter-in-place orders, supply chain disruptions and collapsing consumer demand, millions of businesses have received loans under the Paycheck Protection Program (PPP) as a lifeline. Many of these businesses now face uncertainty as to their next step.
Soon after loans began to be disbursed in early April, the program’s initial tranche of $349 billion was depleted, leaving many small businesses uncertain whether they would receive funds. At the same time, several publicly traded companies disclosed that they had participated in the program, collectively receiving tens of millions of dollars in loans. Whether or not these companies had violated any part of the PPP, the press and several politicians stoked outrage over the fact that publicly traded companies, in some cases with sizable market values, received such large loans.
Consistent with the CARES Act requirements, participants have been required to certify in their application for a loan that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the [a]pplicant.” This economic need certification has now become the focus of intense scrutiny as the press, members of Congress and the U.S. Treasury Department attempt to satisfy public demand that only truly needy companies receive funds.
On April 23, the Treasury added Question 31 to its continually updated Frequently Asked Questions document. Question 31 states that borrowers must make the need 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. Treasury further stated 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.” Question 31 acknowledges that the CARES Act specifically negates any requirement that a borrower be unable to obtain credit elsewhere, but does not clarify how to reconcile the new guidance with the statute. On April 28, Question 37 was added, which implied that private companies with “adequate sources of liquidity” face the same compliance issue as the public companies described in Question 31.
If you are a business owner who took a PPP loan, you probably have questions as to what you should do now. It is impossible to know how the PPP program will ultimately be policed. The Treasury’s rulemaking continues, and politicians and journalists add their own pressures on a daily basis. We can, however, provide some general guidelines that small businesses with PPP loans should follow.
My business took a PPP loan. Now I want to return the money to avoid the liability and risks. What should I do? Treasury initially provided that businesses could return PPP funds by May 7 with “no questions asked.” That deadline has been extended to May 14. Treasury has stated that any business repaying its loan by this date will be deemed to have made the need certification in good faith. If you wish to take advantage of this deadline, you should contact your lender to arrange repayment immediately. You should not explain why you wish to repay the funds.
If I keep the money, will I be investigated? Treasury has indicated that every business requesting forgiveness of a loan in excess of $2 million will be “audited.” The nature of this audit has not been clarified. It is also possible that other borrowers could be selected for audits, which could be random or determined by criteria selected at a later date.
Will I be audited or investigated if I don’t request forgiveness? That is unclear. You should not assume that repaying the loan after May 14 or not requesting forgiveness will preclude you from being audited or investigated.
I am confident that I meet the eligibility standards for a PPP loan. What should I do to protect myself?
- Make sure you have written corporate authorizations: Your company’s board of directors (or managers of an LLC) should have written documentation of their approval of applying for a loan, accepting a loan and the determination of eligibility. This can be documented in a written consent or resolutions adopted at a meeting. An attorney can help make sure your documentation is complete.
- Document the circumstances of your economic need: Your company should have a file documenting the circumstances that led you to take PPP funds. This can include canceled contracts, declining sales, actual or projected effects of shelter-in-place orders, and supply chain problems. You should also document the need for liquidity and why it could not be obtained elsewhere.
- Businesses with PPP loans should carefully consider the risks before making distributions or dividend payments to owners, paying bonuses to highly compensated executives or engaging in non-ordinary course spending. While these actions are not specifically prohibited, they could call the borrower’s economic need for the PPP loan into question.
What documentation will I need to provide to my lender or the SBA to have my loan forgiven? The CARES Act requires that a business seeking forgiveness of its PPP loan will be required to submit an application. Treasury has not published a form of such application. For now, the only guidance is what is stated in the CARES Act statute:
- Documentation verifying the number of full-time equivalent employees on payroll and pay rates, including: (A) payroll tax filings to the IRS; and (B) state income, payroll, and unemployment insurance filings;
- Documentation, including canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
- A certification from an authorized representative that: (A) the documentation presented is true and correct; and (B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments;
- Any other documentation the administrator determines necessary.
Is information about my PPP loan confidential? You should assume that information about PPP loans is not confidential. It is possible that PPP loans will be disclosed in an annual report by the SBA on its 7(a) loan program, under which the PPP has been administered. There is also nothing to prevent the federal government from publishing such information in another format. You can also expect journalists and others to make requests for information about PPP loans under the Freedom of Information Act (FOIA). The PPP loan application clearly states that the SBA will provide such information to third parties under FOIA if so requested.