Newly Released Guidance on How to Calculate a PPP Loan
The guidance specifically addresses the following types of businesses:
- Self-employed individuals
- With no employees
- With employees
- Who reports income on IRS Form 1040 Schedule F
- S corporations
- C corporations
- Non-profit corporations
- Including nonprofit religious institutions, veterans organizations and tribal businesses
- Limited Liability Companies
The new guidance explains the documentation that may be necessary to substantiate a PPP loan amount. Businesses should review the new guidance for their applicable entity type and consult with their lender with respect to any additional documentation that may be required.
New SBA/Treasury Statements on PPP Eligibility
On April 23, 2020, April 24, 2020, and April 28, 2020, the SBA and the US Department of the Treasury issued a series of statements in response to criticism that several large companies had received PPP loans (see Questions 31 and 37 of the FAQs found here and Section 2(b) of the IFR found here).
The statements clarify that in order to make the certification that current economic uncertainty makes the PPP loan request necessary to support the ongoing operations of the applicant, each applicant must take into account (1) its current business activity and (2) its access to other sources of liquidity.
In their April 28, 2020, joint statement, Treasury Secretary Mnuchin and SBA Administrator Carranza stated:
“We have noted the large number of companies that have appropriately reevaluated their need for PPP loans and promptly repaid loan funds in response to SBA guidance reminding all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender's submission of the borrower's loan forgiveness application. Regulatory guidance implementing this procedure will be forthcoming.”
Caution for Businesses Receiving Large PPP Loans, Public Companies, PE/Hedge Fund Backed Companies, and Businesses Owned by Private Companies With Liquidity
The context of the statements serve as a caution to PPP borrowers and applicants, particularly those that receive PPP loans in excess of $2 million and those, regardless of PPP loan size that are (1) public companies, (2) companies owned by private equity funds or hedge funds, or (3) businesses owned by private companies with adequate sources of liquidity. For example, the response to Question 31 in the FAQs explicitly states that “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.”
What Borrowers/Applicants Need to Do
- Evaluate (or Reevaluate) Need. All PPP borrowers and applicants should evaluate (or reevaluate) their “need” for PPP proceeds. For example:
- Does the borrower/applicant have access to a meaningful line of credit or other reasonable sources of capital (e.g., equity contribution from owners, etc.)?
- Has the borrower’s/applicant’s revenue been reduced by the COVID-19 pandemic?
- If the borrower/applicant is a publicly-traded company, has there been any material change in the price of the business’ stock?
- What is the reasonable forecast for the borrower/applicant’s recovery?
- Document Decision and Reasoning. Given the likelihood that PPP borrowers (especially those that receive PPP loans in excess of $2 million and those, regardless of PPP loan size that are in any of the three categories described above) will be scrutinized, PPP borrowers/applicants should document their analysis as to why the PPP loan is “necessary” to support the borrower/applicant’s ongoing business operations. The document can take many different forms (e.g., a memo to file, board resolution, etc.) and should be prepared contemporaneously with the submission of a PPP loan application, or, in the case of businesses that have already submitted applications, as a review of their application in light of the Treasury guidance above. Regardless of form, borrowers/applicants should create and retain written documentation of the basis for their determination the loan is necessary, including consideration of alternative sources of funds.
- Return Proceeds if not “Necessary.” If a business has already received a PPP loan and believes that, given the new guidance, the loan is not “necessary” to support ongoing operations, the US Department of Treasury has provided a safe harbor to pay back the funds prior to May 7, 2020.