As one of the largest loan programs in American history was rolled out to help small businesses, it’s not unexpected to see many questions and responses by the U.S. Treasury in the form of FAQs to help clarify the government’s intent with respect to PPP funds eligibility and usage. But are they leaving businesses with more questions than answers?
Eligibility and usage are cornerstones as to whether a company will have its loan forgiven, or whether its owners, officers and directors will be subject to penalties and criminal prosecution for making an application when their company has alternative access to capital, such as the cases involving Ruth’s Chris Steakhouse and Shake Shack.
In a recent tweet, Zachary Warmbrodt of Politico stated, “Marco Rubio says the names of business that received PPP loans will be made public. ‘Treasury, SBA is eventually going to have to release that. I always thought they were going to have to, and if they don’t, we’ll make them do it.’”
The message being sent by the government? All companies need to be prepared to justify eligibility and forgiveness. Let’s start with a look at eligibility.
Eligibility: As simple as it looks?
At first glance of the CARES Act, the only eligibility requirements were that a business had to have no more than 500 employees. For companies with a NAICS code beginning with 72 (hospitality and restaurants), their employee count was based on a per-location basis. In addition, there had to be economic uncertainty resulting from COVID-19 impacting the business — a rather broad statement.
The SBA, in consultation with the Department of the Treasury, has issued guidance in the form of FAQs 31 and 37 as it applies to large companies (publicly held) and private companies (the rest of us).
Here’s what FAQ31 for public companies states in part: “Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘current 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.”
Translation: It’s important to keep in mind that this is your certification, meaning banks may rely on a borrower’s certification regarding the necessity of the loan. In other words, just because your bank processes your loan application, that doesn’t mean you’re necessarily eligible for the funds.
FAQ 37 for private companies simply states see FAQ 31. So, what does this mean for the rest of us? To avoid problems, every business needs to document how it arrived at needing the funds based on the economic uncertainty surrounding COVID-19. Sounds simple, but consider these real-life examples:
- If a business doesn’t experience a significant revenue decline, but has a decline year over year of cash, does it qualify?
- Does a business where the business owner has some financial means qualify? Should this small business owner be required to liquidate investments or a 401(k) to infuse capital into their business?
- What about a small business with an established line of credit with a personal guarantee by the business owner? Should the small business owner be required to access these funds with a personal guarantee without regard to the PPP funds and jeopardize the small business owner’s personal financial well-being as well the well-being of the business?
I recently attended a webinar with some SBA representatives, where responses to most questions were referred to the Department of Treasury for additional guidance. However, there was much discussion regarding the above fact patterns. In substance, the representatives continued to mention “good faith representation” regarding economic uncertainty. At no time did anyone state that having a line of credit or a high net worth owner(s) would be a detriment to seeking the funds and being eligible. All stated it’s based on facts and circumstances and all factors should be considered in determining eligibility.
Economic uncertainty doesn’t only pertain to current conditions, but also the future economic impact on small business — meaning no one really knows how the economy will behave once the country is reopened. Receiving these funds may be the difference between survival, bankruptcy, or reduced work force.
In anticipation of being asked to justify your PPP application, have the following information ready:
- Business factors you were seeing which led you to change your business model from salary cuts to headcount reductions to overall expense reduction. One page is enough for a summary.
- Current and future impact on revenue/order cancellations.
- Impact on accounts receivable collections.
- Factors which led you to retain your employees.
- Concerns about the future which led you to apply for funding.
- Inability to access capital and liquidity
- Unwillingness or inability of a business owner to put funds into the business
[Important update 5.6 — Repayment date has now been extended to May 14, 2020. Borrowers do not need to apply for this extension.]
Although not all-inclusive, this should you give something to consider if and when the question is asked. Keep in mind if a business is ineligible, it has until May 7, 2020 to return the funds with no repercussions. One thing the representatives on the webinar agreed upon is there will be more guidance, so stay tuned.