On April 23, 2020, the Small Business Administration (SBA) issued guidance to the Paycheck Protection Program (PPP) under the CARES Act. This followed an April 21, 2020 declaration by Secretary of the Treasury, Steve Mnuchin, that there would be “severe consequences” to large companies that inappropriately applied for PPP loans.
All of this was in reaction to complaints about large companies, publicly held corporations and companies backed by private equity receiving PPP loans, while many small businesses in need did not.
The guidance, which can be found here, contains 43 FAQs and is supplemented frequently. The question of most interest and confusion to many is question number 31, issued on April 23, 2020:
31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent 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. For example, it is unlikely that a public company with 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.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
The yellow highlighted portions of the answer are what has become of greatest interest to those who borrowed under the PPP. Those statements are what the borrower certified by signing the PPP application. The SBA further states in the answer above that any borrower who repays the loan in full by May 7, 2020 will be deemed by the SBA to have made the required certification in good faith. The issue and confusion is due to the lack of definition to the phrases highlighted above.
On May 5, 2020, the SBA extended the Safe Harbor loan repayment date from May 7, 2020 to May 14, 2020. With the extension of the date, there is hope that clarification from the SBA will be forthcoming.
Loan Forgiveness Review:
On April 28, 2020, Secretary Mnuchin stated that a full review will be conducted for any company that has borrowed in excess of $2,000,000 before loan forgiveness. It is expected that companies that borrowed below the $2,000,000 level will also have a significant review during the loan forgiveness process.
We cannot make a determination whether or not your company would meet this standard. We recommend that you consult with your CPA, Banker and Legal Counsel to better understand your position.
Confirm your decision:
With the April 23rd guidance, it is recommended that companies who applied in the first PPP process review their decision and look at it in light of the guidance as well as the comments made by Secretary Mnuchin. Keep in mind, participation in the PPP will be public record. It is important to be confident that the decision to participate was proper and defensible.
If you confirm your decision:
We recommend that if you do participate in the PPP after May 14, that you maintain documentation to support your decision. Items to document and retain are:
Evidence of revenue that was lost or delayed due to the pandemic and Safer at Home order.
Documentation of all increased expense costs. This includes increased material costs due to supply chain concerns and increased labor costs due to social distancing requirements for a safe workplace as a result of COVID-19 requirements.
Correspondence from your creditors regarding financial concerns they have with their customer base due to the current economic downturn.
Being an essential business does not exclude you from scrutiny of creditors, but receiving PPP funds helps to maintain your surety line. Underwriters have concerns about the financial impact on their clients and likely would not know the impact until they receive 6/30/2020 interim financial statements in August or September. There are concerns about revenues falling due to project delays or cancellations, accounts receivable risks and increased expenses. Knowing that PPP funds are in place to help operational expenses allows underwriters to confidently continue offering the surety credit contractors need.
Reliance on a working capital line of credit as a source of liquidity for operations is contrary to the underwriting approach of most bond companies. A working capital line of credit is to be used as a last resort to supplement temporary cash flow deficiencies. As a demand instrument, it is viewed negatively by underwriters to be in place to improve operational deficiencies.
In economic downturns, private work is frequently delayed or cancelled. With the current health crisis, there is an expectation that public funding will be cut significantly as tax revenues will decrease. Having PPP funds in place help to mitigate the concern of a contractor’s ability to withstand the downturn.
We hope this helps you as you evaluate your PPP decision. If you have any questions, please reach out to your trusted advisors at Hausmann-Johnson Insurance.