On March 27
th President Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The CARES Act implemented the Paycheck Protection Program (PPP Loans) that millions of business around the country have applied for and received in either the original round of funding or the second round of funding that began in late April.
As many of you are aware, the original intent of the program was to allow businesses to keep their employees working during these unprecedented times. The program also includes potential loan forgiveness if the funds are used for payroll, rent, mortgage interest and utilities within certain parameters.
The loan application required borrowers to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”. Neither the application nor its instructions provide any guidance as to what that means. When the program began it was safe to say that nobody knew what the economic impact might be to their business.
Since then, the SBA has, in conjunction with the Treasury, issued some warnings to PPP borrowers who may not have needed the PPP money or who applied for a loan based on a misunderstanding or misapplication of the required certification standard (the statement above). These new interpretations are a significant departure from the plain language of the CARES Act.
The SBA and Treasury clarifications still leave many questions but here is what we do know:
1.
The SBA and the Treasury have the right to audit the loans. In fact, Treasury Secretary Mnuchin has indicated
all loans greater than $2 million will be audited.
2.
If audited, the government will look for documentation of the economic uncertainty that necessitates the loan.
3.
In addition, the government will want an explanation of why any alternative sources of funds that would not be “significantly detrimental to the business” were not available or insufficient. For example, did the company have a significant cash reserve, did the company have an existing line of credit it could have drawn on, and if other funding was available would it have been enough to support ongoing payroll and other operating expenses.
4.
The SBA and the Treasury have indicated that any borrower who, in light of these new clarifications determines they should not have taken the loan, repays the loan in full by
May 7
th
, 2020 will not be scrutinized.
What to do now?
1.
If you have already received a loan, we recommend putting together an internal analysis documenting the economic uncertainty both current and foreseeable (i.e. whether the business is allowed to fully operate, ability of customers to pay, ability of suppliers and vendors to deliver etc.) and the availability of other sources of capital.
2.
Consider, in hindsight, if you can honestly attest to the statement “certain economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”. If the answer is no, you may want to consider repaying the loan by Thursday May 7, 2020.
3.
If you have applied for but not yet received loan proceeds, consider this new guidance and decide if taking the loan is appropriate for you.
This is a fluid situation and we do expect the scrutiny to fall on larger more visible companies who likely have access to significant sources of capital. That being said it behooves you to consider these items carefully in the context of significant penalties that could be levied if it’s determined the loans should not have been taken out.
Please contact us with any questions.
