After this article was initially published, the SBA announced they are extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
In recent days, the Small Business Administration (SBA) and Department of Treasury have provided additional information on PPP loan eligibility for various borrowers. The SBA has tightened the initial eligibility requirements and has even indicated it plans to “review” all loans in excess of $2 million.
While recent FAQs released by the SBA and Treasury provide some helpful guidance, some answers have been a source of more confusion than clarification. The primary cause of concern is based on the SBA’s guidance that “companies with adequate sources of liquidity” will be unlikely to be able to make the required economic uncertainty certification to necessitate the loan. They note that some borrowers may have made that certification without understanding the requirement and may now realize they are not eligible.
As a result, the guidance provides essentially a safe harbor for borrowers who may not qualify, that if the loan is repaid in full by May 7, that certification will be considered to have been made in good faith.
Read more: SBA PPP loan economic uncertainty certification
Supporting your economic need for a PPP loan
As May 7 looms, many companies will be forced to analyze what is an “adequate source of liquidity” and how much is too much to certify that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
Contractors may face a unique challenge as the economic impact of COVID-19 may not be immediately felt due to many states classifying construction as essential, so work may continue, albeit with new hurdles. Working capital may even be sufficient to finish current jobs, but backlog or lack of backlog is a constant reminder of how quick a contractor could be out of work.
With the current lack of authoritative guidance, business judgement will be critical. In many ways, no one is more qualified to determine adequate liquidity than a company and its close advisors. After all, no one is more familiar with the market, industry, niche, cash flows and capital needs. A regulatory challenge to a well-reasoned and reasonable conclusion would require interposing a regulator’s judgment for the judgement of those closest to the situation.
In analyzing and supporting the question of whether adequate liquidity exists, proper documentation of the analysis and conclusion is likely to be the best support of your judgment. The following items are just a few examples of factors you might consider as you analyze the necessity of the loan:
- Financial statement ratios and projections, including working capital needs and cash flow projections (compare pre-COVID projections to updated versions; have collections slowed, and will job delays have an effect?)
- Bonding and banking requirements (a “liquid” company that loses the ability to bond or access their line-of-credit may not be liquid for long)
- Backlog (have projects been delayed or canceled?)
- Bidding (has the quantity of projects being bid reduced?)
- Labor projections (have project delays or job site requirements caused unnecessary labor?)
- Payroll (were there layoffs or furloughs prior to obtaining the loan, and now you have been able to bring employees back using these funds?)
- Service work (has your ability to perform service work in residential or commercial areas been reduced due to a lack of demand?)
- Other considerations unique to the business
After careful analysis, if you do conclude the loan was a necessity, document your analysis and judgment, there on. Consider preparing a memo and supporting documentation to memorialize your conclusion. Include discussion on the analysis and approval of the PPP loans in your board of directors’ meeting minutes. Consult and involve your legal counsel to make certain you comply with legal requirements with respect to these steps.
Until the SBA or Department of Treasury offers detailed guidance and a clear definition of “adequate liquidity,” these unknowns are going to be up to interpretation. Use of business judgment, documented and supported with evidence, will be the best guidance you will get.
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