PPP Loan Concerns – Safe Harbor Clarified

May 13, 2020 | by Kevin J. Gienger, CPA

This Article has been updated with new guidance from the SBA dated May 13, 2020

You may have seen in the news a number a higher profile companies who received SBA loan funds from the Paycheck Protection Program later decided to return their money to the government.   This program was intentionally fast moving and the high volume of need combined with the scarcity of funds in the first round of disbursements left many small businesses without funding.  The pubic opinion of this program began to put pressure on both companies and banks, resulting in the decision by some companies to return the money.

In your PPP application all borrowers make a good faith certification that:

  • “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”
  • “The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the Paycheck Protection Program Rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.”

UPDATED:  The SBA clarified on May 13, 2020 that all borrowers (together with their affiliates) who have PPP loans of less than $2,000,000 would be deemed to have made their certification in good faith.  The SBA determined that it is less likely that these companies would have adequate sources of liquidity necessary in the current economic environment than borrowers with larger loans.

As the program rolled out, both of these certifications seemed to be easy bars to clear.  We all had to make decisions without much guidance on the certification.  Then after the first round of funding was exhausted the following chain of events unfolded:

  • On April 23rd the Treasury provided a Safe Harbor to your good faith certification if you return the money by May 7th (later extended to May 18th). They also updated their FAQ with question #31 stating businesses owned by large companies with adequate liquidity:
    • “…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.”
  • On April 28th The Treasury announced that all loans in excess of $2 million would be reviewed and they added FAQ #37 which provided clarity that question #31 applied to private companies with adequate sources of liquidity.
  • On May 5th the Treasury extended the Safe Harbor to May 14th and indicated they would provide further guidance on the good faith certification in FAQ #43. You do not need to apply for this extension of time.
  • On May 13th the Treasury provide the additional guidance when they added FAQ #46 . The Safe Harbor for borrowers (together with their affiliates) who have PPP loans of less than $2,000,000 would be deemed to have made their certification in good faith.  They also clarified that those businesses with loans in excess of $2 million NOT deemed to have made a good faith certification when reviewed by SBA would be asked to return the money and the loan would not be forgiven.  Additionally, if you repay the loan on notice from SBA they would not pursue enforcement or refer the issue to other agencies.
  • Later on May 13th the Treasury extended the Safe Harbor to May 18th and indicated they would provide further guidance on the good faith certification in FAQ #47. You do not need to apply for this extension of time.

With this new clarification any company with a PPP loan in excess of $2 million needs to document their business reasons for requesting this loan. They should also document their access to other liquidity.

Please keep in mind the intent of this relief was to keep your employees working, or at least being paid with benefits intact while business was interrupted.  The loan proceeds if used within 8 weeks on allowable expense may be fully forgiven.  We suggest that all companies take time now to document your business reasons and needs for applying for the PPP Loan.  Documentation might include considerations of the following:

  • The current impact of COVID-19 on your business in terms of revenue, cash flow and the ability to perform normal operations.
  • Your plan for lay-offs, pay cuts or reductions of hours to employees that would have been implemented without the funding from this loan.
  • The future uncertainty your company faced at the time you applied for the loan.

Further, you should also consider the fact that the loan amounts, company names, and names of company owners may be made public at some point in the future.  Loans under $2 million may also be selected for review.   It is important to keep good records of the financial support for requesting the loan amount, allowable expenses used for forgiveness and your support of your good faith certification.   Ultimately, this is an individual decision each borrower needs to make based on their own unique business situation.

 

We will be providing updated information as new guidance is received for this program.  If you would like help in thinking though this decision we are available to help.