This article was updated as of 5/6/2020.
Now that the funds from the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) have started flowing to eligible applicants, businesses have two primary concerns: (1) was it a mistake to apply for a PPP forgivable loan, and (2) how can businesses maximize the forgiveness of those loans?
In light of several large, well-known businesses receiving PPP funding, which prompted public outcry, the SBA recently updated its PPP guidance. It now states that borrowers must certify in good faith that their PPP loan request is necessary. Borrowers must also carefully review the required certification for the loan. The certification needs to demonstrate the loan’s necessity as the means to support ongoing business operations. In weighing whether to apply for a PPP loan, the SBA states that businesses need to take into account their current business activity as well as 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.
Since the release of this guidance, a significant number of larger borrowers have voiced concerns, and are worried their business could be held liable for receiving PPP funding. Treasury Secretary Steven Mnuchin added more fuel to these concerns by recently stating the SBA would audit any company that received more than $2 million in PPP loan money. The Secretary also stated any company could face “criminal liability” if it turns out the company was not eligible to apply.
While the guidance concerning this program continues to evolve, the fundamental question is whether current economic uncertainty makes obtaining a PPP loan necessary to support a company’s ongoing business operations. This question is more easily answered in some industries than it is in others. Businesses that have already received funding through the PPP may need to reevaluate whether they have sufficient support to justify the necessity of PPP money for ongoing business operations. Any such decision should be vetted through competent legal counsel. Businesses that have had a change of heart may return the loan money by May 14, 2020 without penalty.
PPP borrowers should be prepared to answer requests for information concerning the use of the funding from both the SBA and the Department of Justice. Fraud and abuse will be a strong focus of the government, post funding. There will be auditors and investigative task forces. Companies should keep proper documentation outlining decisions relative to the need to apply for a PPP loan. Such documentation may include memoranda, e-mails, and resolutions authorized by the company to enter into the loan.
If a company intends to keep the PPP funds it received and seek forgiveness of its PPP loan, there are certain steps the company should do on the front end of the loan period in order to position itself for complete forgiveness of the loan. These include accounting practices, personnel decisions, and additional record-keeping considerations.
Walter | Haverfield is closely monitoring the guidance concerning this program and is prepared to assist businesses navigate these important, yet complex issues. If you have additional questions, please reach out to us at here.