In recently published FAQs, the Small Business Administration (SBA) provided guidance that is intended to help companies determine eligibility for a PPP loan at the time of the loan application.
Specifically, the SBA instructs that before applying for a PPP loan, borrowers should consider whether their potential access to other sources of liquidity ultimately makes a PPP loan unnecessary to support their ongoing operations. Borrowers must make a good-faith certification that the PPP loan is necessary and should document those needs contemporaneously with the filing of the application.
The relevant portion of FAQ #31, published on April 23, 2020, provides as follows:
“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 [emphasis added]. 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.”
This FAQ also states that: “Any borrower that applied for a PPP loan prior to the issuance of this guidance [April 23, 2020] and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”
In FAQ #37, published on April 28, 2020, the SBA clarified that FAQ #31 applies to both public and private companies.
How this may impact your company
Many companies and boards are now wrestling with the question of whether they should return the funds by May 7th.
There is no bright-line test for this determination, and every company's situation is different. The following is a recommended, but not exhaustive, list of factors that management/boards should consider in making this determination, as of the date of application for the PPP loan:
- Access to other sources of liquidity at the time of application: Does/did the company have other sources of liquidity that can be accessed quickly and efficiently? As noted in the FAQ, doing so should not be significantly detrimental to the business. This should not be allowed to overturn the Act’s waiver of the “credit elsewhere” test and could be read that a private company should not have to consider the liquidity sources of its owners to the extent not already pledged to the business.
- Forward looking projections of revenue and cash flow: While the FAQ mentions economic need at time of application, no one knows how long the pandemic will last, and companies need to be looking out 4-6 months on cash flows needed for operations. What is your company hearing from key customers? Many strong backlogs a month ago have been completely canceled.
- Strength of balance sheet: A strong balance sheet with significant unrestricted cash will likely be an indicator of less economic uncertainty. High levels of accounts payable is of course an indication of cash needs. High A/R levels may not translate to cash, since many customers are stretching out payments or in some cases ceasing vendor payments for the time being.
- Industry and geography trends overall: Are you or your key customers in markets that have extended stay at home orders? Is your industry, even if an essential business, seeing a drop in orders as people use fewer services? For example, hospitals, while using most other resources in battling COVID-19, are seeing a drop in all other services as individuals are not having elective procedures. This is impacting companies that serve in the supply chain to the hospitals.
- Scope of additional costs being incurred: Some companies, while still open as essential businesses, are seeing significant increases in operating costs and extra costs for PPE, cleaning wipes, etc.
Also, it’s unknown how much information will be made public on companies receiving PPP loans. While disclosures to date have been on public companies and very high-profile private companies, over time the SBA may make more information available. Borrowers need to be comfortable with this potential disclosure to the public.
Lastly, in FAQ #39, published on April 29th, the SBA stated that all PPP loans over $2 million, and other loans as deemed appropriate, will be reviewed by the SBA following the lender’s submission of the borrower’s loan forgiveness application.
If you need assistance applying for a PPP loan or understanding your eligibility, contact Wipfli.
For further resources to help your business navigate the impact of COVID-19, visit our COVID-19 resource center.
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