The Paycheck Protection Program (PPP) was created to provide funds to qualified small businesses negatively impacted by the COVID-19 pandemic. The loans are for specified uses, including payroll costs, rent, utilities, and mortgage interest, and may be forgiven if they are used in accordance with PPP terms and conditions. However, in efforts to disseminate money to struggling small businesses quickly, several requirements of the program were not initially clarified, leaving the SBA to provide additional guidance.
Recent news reports identified large companies that received PPP funds, then, in some cases, returned the money. These businesses were deemed to have adequate liquidity from other sources or to have violated the requirement that the money was “necessary” to their operations due to the “current economic uncertainty.” The companies were criticized—their ethics and integrity questioned— by the media and by small businesses that were unable to get loan funds they applied for.
On April 23, the SBA released an update to its FAQ document with the following:
- All applicants must certify in good faith that, “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The economic uncertainty must be due to the COVID-19 pandemic.
- Per FAQ #31, “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. For example, it is unlikely that a public company with a 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.” To read the entire FAQ, visit https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.
- The same FAQ goes on to state that, “any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in fully by May 7, 2020 will be deemed by SBA to have made the required certification [on the loan application] in good faith.”
The SBA also released an interim rule on April 24 that reiterated this information. The interim rule can be found at https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Requirements-for-Promissory-Notes-Authorizations-Affiliation-and-Eligibility.pdf.
As well, guidance warned that businesses qualifying for funds and later found to be ineligible and business that didn’t use the funds according to the terms of the program would be subject to legal or regulatory consequences. Then on April 28, Treasury Secretary Steve Mnuchin announced that the government would audit all companies receiving over $2 million in PPP loans. Such increased government scrutiny could eventuate in investigations for fraud and abuse. We also anticipate heightened public scrutiny as Employer Identification Numbers of loan recipients are revealed to the public.
As such, we recommend the following:
- Management and the board of directors of an organization that has applied for or received PPP funds should review their financial situation and consider whether their business is eligible in accordance with the spirit and intent of the PPP program.
- Any organization that has received funds and determines that it does not demonstrate necessity in accordance with the new guidance should repay the loan in full by May 7, 2020.
- An organization that has received funding and is eligible according to the guidance must keep comprehensive and accurate documentation on its eligibility, on how it is using the funds, and on complying with the forgiveness terms of the program.
As we expect additional guidance on the PPP program, we recommend that all PPP loan applicants and recipients monitor www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program and home.treasury.gov for more details.
If you have questions about PPP funds, or other economic relief programs, please contact your HBK Advisor.
Update: On May 5, 2020, the SBA released an FAQ indicating that the safe harbor date was extended to May 14, 2020. The SBA also indicated that it intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
Updated guidance regarding the SBA’s interpretation of this provision and the safe harbor date may be found at https://hbkcpa.com/sba-releases-additional-guidance-on-ppp-certification/.