Over the last month we have done a significant amount of SBA and PPP loan consulting with our clients. One thing that we have learned is that the guidance regarding these loans is constantly changing. Our emphasis has shifted from calculating PPP loan borrowing amounts to now calculating potential loan forgiveness amounts and demonstrating the good faith certification of need for these loans.
Forgiveness
PPP borrowers can qualify to have their loans forgiven if the proceeds are used to pay certain eligible costs within in the 8 week period after the receipt of the loan. However, the amount of loan forgiveness will be reduced if less than 75% of the funds are spent on payroll costs and the remainder on rent, utilities and mortgage interest.
There are rules for retaining full-time equivalent employees, individual employee salary levels and retroactive relief provided to employers who rehire employees by 6/30/20. We can provide guidance and planning opportunities, so please call.
Good Faith Certification
In addition to the mechanical loan forgiveness calculations above, the PPP application required a good faith certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”. The SBA is beginning to provide some clarity to this subjective phrasing and is now warning borrowers that in the absence of a good faith certification borrowers can be assessed penalties and in some cases be subject to criminal charges. A few frequently asked questions recently released and posted on the SBA website address this certification ( link). Question #31 infers that a public company that has access to public markets and other sources of sufficient liquidity may not be able to make this certification of need in good faith. Another, #37, addresses the need in the same way for a private company, referring the reader back to the answer for #31. Secondly, in FAQ #39, the SBA reminds borrowers of the certification of need on the application and indicates that they will review (audit) all loans in excess of $2 million and other loans as appropriate, in their opinion, to determine economic need. A borrower can fall under the safe harbor provisions to avoid prosecution, penalties and potential criminal liability by repaying the loan before May 14, 2020 (FAQ #43)
Clearly, it would be wise to formally document projected business disruption by preparing cash flow projections and narratives describing what could occur if the shutdown lasts for certain periods of time, how long it will take to return to ‘normal’, how many staff will be laid off if revenues decrease, etc. and compare this information to pre-shutdown figures. If these exercises reveal that you have sufficient liquidity or ability to maintain your workforce at average 2019 levels for the next 6, 9, 12 or 18 months without the PPP loan, it may make sense to repay all or part of the loan before May 14.
We acknowledge there are still many uncertainties embedded in the foregoing. As more guidance is released we will keep you updated.