PPP Loan Update – April 27, 2020

By Alan R. Sasserath, CPA, MS

Last week, the Treasury issued further guidance relating to the eligibility to qualify for the Paycheck Protection Program (“PPP”) loan. In fashion true to form, the guidance issued was sufficiently vague to have many wondering whether or not they are eligible for the PPP loan and can sign off on the certification, “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Why do we care about this? Without eligibility for the PPP and a good faith sign off on the statement, at best, you cannot have PPP loan forgiveness and at worst you cannot have loan forgiveness and will have additional penalties for making a false statement.

Below is the specific guidance:

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, 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. 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. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. 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.

First and foremost, the question is aimed at businesses owned by large companies. Let’s face it, this is fallout from the PPP loans issued to Shake Shack, Ruth Chris Steakhouse, and others. However, the sentence in italics above has many second guessing themselves as to whether they are eligible for the loan or not.

One troubling phrase in the italics sentence above is “ability to access other sources of liquidity.” What does that mean? Does that mean that if you have built reserves or have access to a credit line, that you should be ineligible for the PPP loan? Taking this a step further, what if your competitor spent recklessly while you were conservative? Should they be eligible for the PPP while you are not? What if you were able to pivot your business to be able to maintain your business at some level, does that work against you in determining your eligibility for the PPP loan?

Ultimately, what are you certifying? Are you certifying that: (a) you are currently able to show economic harm? (b) you are ready to close your doors without this loan? (c) you are ready to lay-off employees without this loan? Or, are you certifying that the current economic uncertainty could adversely impact your business more than the usual business risks and the loan is necessary to support the ongoing operations of your company?

There are more questions than answers. You should understand that these questions exist. In essence, loan forgiveness is not a god given right. There are many potential business risks that are more prevalent/concerning now than just two months ago. If you are going to obtain the PPP loan, you should be able to present your case as to what the current business risks are that create the economic uncertainty/conditions specific to you and your need for the PPP loan. Even if you can do that, a risk of repayment still exists depending on the final rules. Additionally, if you did not sign off on the statement mentioned in the first paragraph above in good faith, penalties could result.

Once again, the PPP eligibility question from the Treasury stated above is posed to businesses owned by large companies. However, the question of PPP eligibility seems to be evolving into a hot topic and is worthy of attention and monitoring.

Please note that the above analysis is our opinion and like most of the significant questions related to the PPP currently, there is little guidance. If you have concerns as to whether you are eligible for the loan you should speak with an attorney.

This is the first of what we expect to be many PPP loan forgiveness posts.

As always, thank you for your time and please let us know if we can be of further assistance.