The Treasury Department is granting safe harbor to large and public companies that voluntarily return stimulus funds by this Thursday, May 7 under new guidance regarding the PPP’s “necessity” certification.
A number of companies that received loans in the past few weeks through the Paycheck Protection Program (PPP) are returning the money, as the Small Business Administration (SBA) issued new guidance in its FAQ concerning the program’s “necessity” certification.
Noted below are key highlights in the SBA’s most recent FAQ guidance:
- Question #20 refers to the borrower forgiveness, which states: “the eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower.” Please note that the SBA has not finalized guidelines related to loan forgiveness, so you should continue to check the SBA’s website for any changes.
- Question #31 relates to borrower “necessity” certifications, which states: “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. 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The safe harbor provision encourages repayment should a borrower determine the “necessity” is no longer valid on the basis of the guidance.
Since the original $350 billion in PPP loans ran out in mid-April, adverse publicity unraveled around the ambiguity of “need” based companies and those that received funds. When first released, the CARES Act contained vague language on a loan with a funding cap, so many businesses applied in good faith at the first sign of governmental support.
Hundreds of publicly traded and large companies have received PPP loans, and the aid package has since been replenished with an additional $310 billion, but many small business owners are still waiting for a federal lifeline and are faced with limited resources or the possibility of laying off employees and/or closing their doors.
Now that guidelines have become a bit clearer, the following questions may be considered as examples to determine the claim of the loan as intended by Congress:
- Have workers been put back on payroll in a timely manner after receipt of the funds?
- Is the business in an industry that is considered nonessential or otherwise have operations adversely affected during lockdown?
- Does the public company and big chain (or big business) have access to other capital?
- Will the business be able to operate without the loan and for how long?
- Is the business in a position to undergo a federal audit to support the need for the funds?
Should a business wish to retain the PPP funds, documentation supporting the need-based loan should be compiled to establish good faith and necessity of funds. Borrowers may consider incorporating financial statements, including budgets and projections, availability of cash, and access to any additional funds to support the claim.
In an effort to assure compliance based on need, Treasury Secretary Steven Mnuchin plans to conduct oversight of the aid package and has communicated intentions to audit all loans over $2 million to ensure they were justified after large public companies and big chains have taken funds that were intended for small businesses.
Please also note that PPP loans are distributed through a government program, and thus, subject to the Freedom of Information Act. This means that a company’s loan information could be released as part of a public report in the future.
Large and public companies will not face litigation charges or unfavorable repercussions for voluntarily returning the funds as noted above through the safe harbor provision. Read a list of businesses that have returned loans.
Please contact me at firstname.lastname@example.org or (805) 963-7811 with any questions you may have regarding loan programs or how BPW may best serve your business during this time.