On May 13, 2020, the Small Business Administration (SBA) once again updated the FAQs for Paycheck Protection Program (PPP) loans. These newest updates include information about how the SBA will audit the good-faith certification regarding PPP loan requests. This information has been lacking up until this latest update.
The CARES Act from March 27, 2020 created a forgivable loan program under the PPP to provide relief for small businesses affected by the current COVID-19 pandemic. On April 24, 2020, the president signed the Paycheck Protection Program Enhancement Act to increase the amount of money available for funding. Small businesses with 500 employees or less, non-profits, independent contractors, veterans’ organizations, and sole proprietorships can apply for SBA grants, SBA disaster loans, and PPP loans. The Small Business Owner’s Guide to the CARES Act can be found here.
The latest guidelines pertain to the PPP loans. Applications for PPP loans require these certifications in good faith, and state, “Current economic uncertainty makes this loan request necessary to support the ongoing operation of the Applicant.” Previously, in this article, we shared the May 5, 2020 update which stipulated that businesses must review their “ability to access other sources of liquidity sufficient to support their ongoing operations.” The SBA along with the Department of Justice also warned that any fraudulent claims for PPP loans would be prosecuted.
Repayment Safe Harbor. In light of this update, a repayment safe harbor was created, and the deadline was extended to May 14, 2020 at which point repayment of the loan would “be deemed by SBA to have made the required certification concerning the necessity of the loan request in good faith.” However, as of May 13, 2020, the SBA is lengthening the safe harbor to May 18, 2020, so borrowers can review the guidelines regarding how the SBA will review good-faith certification. This can be found in the answer to Question 46 of the PPP FAQs, found here.
In particular, this answer states that, “any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” The SBA determined that most small businesses requiring $2 million or less are “generally less likely to have had access to adequate sources of liquidity…” For those businesses with loans greater than $2 million, there may still be a basis for making the required good-faith certification, but those loans will be reviewed and if the certification was lacking, the business will not be eligible for loan forgiveness.
Careful Accounting. Although the continuing updates do give clarification on some points, it is still essential that applicants do their due diligence in assessing and defending the necessity for PPP loans. If you have not yet applied for a PPP loan, the more documentation that can be supplied, the better. Businesses should evaluate their current financial condition in light of both long and short term risks and goals. Keep track of how the current pandemic has affected day-to-day business operations regarding employees, financials, reduction of output/decline of demand, wage reduction, etc.
If you have recieved your PPP Loan, keep careful accounting of the use of funds, being able to demonstrate and defend if necessary, the PPP loan.
Some of our recommendations:
- hold funds in a separate bank account
- use funds from that account to pay all payroll, rent, and mortgage interest costs
- keep documentation to show financial impacts from the COVID-19 shutdown (decreased revenue, increased cost of goods, decreased output due to supply chain issues, days closed by govt. order, etc.)
- maintain pristine employee records showing the number of employees kept on the payroll
- avoid expenditures that could be considered frivolous (management level bonuses, unnecessary travel, company parties and social events, etc.).
Whether you have already applied, received your funds, or are planning to apply, it is important to remember to have evidence on hand of the necessity of your loan. We are here to assist and provide strategic advice for you at any time.