On May 5, 2020, the SBA issued yet another new addition to its PPP FAQs, the latest in a “dribble out” of guidance that, slowly but surely, is leaning toward clarification of certain unknowns in obtaining the promised loan forgiveness for these borrowings.
The new FAQ (#43) extends the safe harbor deadline for returning amounts borrowed under the Paycheck Protection Program (PPP) from the original date of May 7, 2020, to May 14, 2020. Borrowers do not need to apply for the extension.
After the initial $349 Billion was quickly depleted and a second round of $310 in funding for additional PPP loan applications was opened on April 27, 2020, the Treasury updated the PPP FAQs (adding #31), to make it clear that companies applying for PPP loans must certify “in good faith” that the funding is necessary to continue moving forward through the government-mandated COVID-19 business shutdown.
FAQ #31 reminds borrowers that they 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.”
Borrowers that could not make that certification in light of the additional clarifications were directed to return the money to avoid penalties. The Treasury also announced that there would be government scrutiny of recipients of larger loan amounts to ensure sufficient need for the funds.
Unfortunately, to date, neither the SBA or the Treasury has provided any guidance regarding how the certifications will be reviewed. Without the guidance, it is difficult to determine if the factors considered by employer/borrowers were appropriate and sufficiently substantive to establish that they met the certification requirements in “good faith.” It is expected ‒ or at least hoped ‒ that information will be included in the final guidance expected imminently.
We are suggesting that Boards of Directors, Management and/or business owners memorialize those items that were considered in conjunction with the original decision to apply for the PPP loan. This information can serve as a written record of the thought process of the decision-makers at the time of the certification and initial PPP application process. We highly recommend that such memoranda should be prepared by all borrowers seeking loan forgiveness.
Even without guidance, it would seem in this current situation of disarray on the part of the SBA and Treasury, that any memorialization of these considerations might include items such as expected revenue and income decreases, perhaps (though not required), estimates of expected future results or projections, prepared if possible, with a focus of what might have been known or knowable at the application date. Moreover, it will be important, if possible, to reconcile those decreases with the corresponding cash flow effects and how those cash flow deficits would be expected to be funded outside the PPP loan resource. The gaps in funding should focus on expected operational performance and “normal” operational performance.
Of course, those steps set forth above will most often apply to employer/borrowers who took the larger PPP loans as they have greater numbers of employees and generally, more financial resources within their companies. Where such projections are not able to be reasonably constructed (i.e., smaller companies and those that simply do not have the resources or capability to produce such projections), we suggest preparing, at a minimum, a narrative of how the business was expected to be hurt by the pandemic as well as the anticipated resultant financial impact of that occurrence.
It should be noted again that there is no guidance on this process and, as such, there is no right or wrong way to prepare a summary of the considerations undertaken in the process of applying for the PPP loan. We simply suggest that all borrowers make an attempt to document those things that were at the front of their minds when they applied for the funds. In almost every case, we expect that such documentation will suffice to address any future questions.
There is no doubt that all PPP borrowers are swimming in a body of water with no specific direction at this time. While the new FAQ provides a bit of time relief to consider the return of the funds, or at least better assess the basis for making the certification in the first place, absolutes will be impossible until we see the final guidance issued by the SBA on this matter.