On April 23, 2020, in response to the hue and cry from many members of the public that large businesses such as the Ruth’s Chris Steakhouse had received PPP funds, the Small Business Administration announced that large businesses with adequate sources of liquidity would not likely be entitled to the funds through this new program.[1] This guidance actually seemed logical in light of the stated purpose of the program, to assist the millions of small businesses that employed many of America’s currently unemployed.
After issuance of this guidance, other concerns arose when questions arose, not just about large businesses but also about mid-size businesses and professional services organizations and their entitlement to PPP loans. In response to these additional concerns, the SBA issued additional guidance in FAQ, #39 which was intended to respond to the second wave of concerns. Unfortunately, the second FAQ appeared to have raised concerns among small and mid-size businesses about whether they should keep or return the proceeds to the SBA.
FAQ #39 essentially expanded on the comments about large businesses and inquired whether all businesses that received PPP funds were at risk based upon the certifications that were made at the time of application for the loans. The loan certification requires all applicants to state that they had acted in good faith and had appropriately evaluated, at the time of the application, the “[c]current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The FAQ response went on to state that when signing the certification, the borrower had to act in good faith taking into account not only their current business activity but also taking into account their current business activity and their ability to access other sources of funds that would permit the business to meet its current and short term financial obligations in a way that was not significantly detrimental to the business.[2
The issuance of FAQ 39 again caused businesses to wonder whether they would be ensnared in what could be considered a trap which would either result in actions ranging from denial of ability to obtain forgiveness to sanctions and/or criminal penalties. Even more troubling for many business owners was the fact that, in many circumstances, neither the financial institutions through which they had received these loans nor accountants with whom they had worked for years would assist them in coming to a final decision as to whether they should sign such certifications or return the money.
The SBA originally required that businesses that received PPP funds should issue certifications not later than May 7, 2020. The date has now been extended to May 14, 2020.
With the extension of time in which to respond, even though there are only 6 days left before certifications of good faith application are due again, businesses that have received such loans should ask the following questions:
- What was our cash position as of the date of application?
- What were our known obligations both new and recurring as of the date of application?
- What type of funds were available to us through other sources?
- Would going into debt through some means other than through a forgivable loan significantly impacted our ability to continue to operate the business?
- Could we have obtained financing through other sources in a timely enough manner that would have assisted the business in avoiding layoffs?
Although this list of questions is not exhaustive, it is a first step in evaluating how to answer the SBA certification about whether a business acted in good faith when seeking the loan.
If after considering these questions, a business is not clear that the business met the necessary prerequisites to obtain the loan, the SBA has provided a safe harbor and is allowing businesses to return the loan proceeds prior to May 14, 2020 and avoid penalties. [3]
If you have further questions, about these or other questions about the Paycheck Protection Plan loans click on this link to review the most recent Paycheck Protection Plan FAQs at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.
If you have additional questions, on this or other employment related issues arising in the context of COVID-19, feel free to contact Sheryl J. Willert at SWillert @williamskastner.com.
[1] See Paycheck Protection Program Loans Frequently Asked Questions (FAQs) #31 April 23 ,2020.
[2] See Paycheck Protection Program Loans Frequently Asked Questions (FAQs) #39 May 6, 2020.
[3] See Paycheck Protection Program Loans Frequently Asked Questions (FAQs) # 45.