PPP Calamity: Ignore This New Guidance at Your Own Risk

The Small Business Administration (SBA), in consultation with the Department of the Treasury, has just released guidance in the form of a Paycheck Protection Program (PPP) Loans FAQ. While informal, the guidance will be the governing rules for qualification and verification for funding, forgiveness and payback under the program.

As I have been advising friends and clients, the program was passed and implemented in such haste that it’s sure to be a calamity. Well, the first shoe has dropped. The treasury has added stipulations that were not a requirement of borrowing when the first tranche of funds was made available. These stipulations are not only required to qualify for those who were shut out of the first round and are seeking funding under the second, they are retroactive to those who have already been approved and received their funds under the first tranche.

The guidance creates a safe harbor rule to pay back the money by May 7 if you reconsider your application and you decide that you don’t qualify. If the money is returned by this date you will get a “free pass” in terms of penalties and interest.

At issue is the certification that a borrower must have “current economic uncertainty (that) makes this loan request necessary to support the ongoing operations of the applicant.” Perhaps our pest management businesses are not being economically affected as immediately as a bar, restaurant or bowling alley are, but the COVID-19 crisis is a fluid situation and we don’t know how it will play out. In addition, during the initial shock the government’s main concern was keeping people employed. Many companies took the funds to continue employing people whom they would have otherwise laid off or furloughed immediately.

While the argument that we can’t tell how this situation will ultimately play out is valid, and that it would be difficult for the government to challenge certification at this point, the only way to prove the pandemic negatively impacted our businesses will be borne out in hindsight based on reduced revenue over time.

Since we can’t investigate the future, the Treasury Department has decided that our businesses do not have uncertainty if we currently have liquidity (cash in the bank) or access to credit lines. The guidance creates a new eligibility test for PPP loans based on an applicant’s actual or potential access to cash. It says:

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.

The guidance applies the above standard to “businesses owned by larger businesses;” however, the consensus among most lawyers and accountants is that this standard will be applied to all who have received funds under the program.

I am in no way suggesting anyone give his money back without careful consideration, but it seems to me that this new liquidity requirement may exceed the intent of the CARES Act by adding a new eligibility rule that’s not addressed in the act. The rule is also doesn’t seem consistent with the law’s intent to maintain employment and have employers use the PPP loan proceeds to keep employees on the job. On top of all that, it does not provide clear guidance to applicants about how to apply the requirement. At some point I believe the validity and enforceability of this new test will get challenged in court. In the meantime, disregard or ignore it at your own risk. As more information with regard to clarity in terms of what “significantly detrimental to the business” means becomes available, I will be sending out updates.

In any event, the key to ending up on the right side of this issue is to make absolutely sure you keep good records. If you need assistance, please contact PCO Bookkeepers.

Author: Dan Gordon