Update On the Payroll Protection Program (PPP)

May 4, 2020

The Payroll Protection Program (PPP) was created to provide loans to help distressed small businesses stay afloat and save jobs during the pandemic. From the beginning, however, the PPP has lacked clear and consistent regulatory guidance. The Small Business Administration’s ongoing interpretation and retroactive regulation has become increasingly hostile toward some loan recipients. Meanwhile, recent negative publicity surrounding the receipt of loans by large companies, hedge funds, and private equity firms has increased scrutiny of the program.

To clarify expectations, the SBA and the Treasury have released new guidance, including two critical questions, #31 and #37, in their Paycheck Protection Program Loans FAQs. These questions, as well as ongoing comments from the SBA and the Treasury regarding “certification of need,” signal a more aggressive posture toward borrowers under this program.

We are sharing this information with you so you can take these considerations into account before accepting a PPP loan.

FAQ #31: 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 current 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 [emphasis added]. 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 the SBA, upon request, the basis for its certification.

Lenders may rely on 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. [published April 23]

FAQ #37: Do businesses owned by private companies [emphasis added] with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31. [published April 28]

FAQ #39: Will SBA review individual PPP loan files?

Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, 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 [emphasis added], following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. [published April 29]

Approved Uses for PPP Loans

There are specific use guidelines for what expenses PPP funds may be used to support in the business. These include:

  • Payroll costs, such as salary, wages, commissions, or tips
  • Payments for vacation, parental, family, medical, or sick leave
  • Payments for group health care benefits, including insurance premiums
  • Payments for retirement benefits
  • Employee state or local payroll taxes
  • Mortgage loan interest
  • Utilities
  • Rent, including some equipment rental costs

Given the original intent of the program—to support small business retention of employees and basic needs, such as rent and utilities—careful consideration should be given when determining whether to use funds to pay employee or owner bonuses, vacations, renovations, employer state and local taxes, or compensation above $100,000 or to purchase new equipment. Prepayment of some rental or other expenses may also be a gray area.

What Portion of the Loan Is Eligible for Forgiveness Under PPP?

The SBA will issue formal guidelines regarding the calculation and parameters of the loan forgiveness amount and certification process. The current guidance suggests forgiveness of up to 75 percent for approved payroll costs and 25 percent for other approved expenses, such as rent or utilities, paid during the eight-week period following your loan deposit. Any remaining loan will have a 1 percent fixed interest rate and two-year maturity. Payments on this loan will be deferred for six months (although interest will accrue during this period).

Borrower Name/Loan Details Subject to Release
Certain information may be released under the Freedom of Information Act (FOIA). The extent and scope of the available data is not entirely clear; however, government institutions are subject to these rules. One industry expert noted borrower identities, director/shareholder/owner names, and loan amounts will probably become public information under the FOIA. Careful consideration of this aspect should be factored into the need for and use of PPP funds.

SEC disclosure requirements. 

On April 27, 2020, the SEC released a new FAQ addressing the disclosure obligations of advisory firms that receive PPP loans. Specifically, the SEC stated that “As a fiduciary under federal law, you must make full and fair disclosure to your clients of all material facts relating to the advisory relationship. If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients, it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance. If, for instance, you require such assistance to pay the salaries of your employees who are primarily responsible for performing advisory functions for your clients, it is the staff’s view that you would need to disclose this fact.”

Evidence that you made this disclosure, whether verbally or in writing, should be documented.

What if You Already Received a PPP Loan?

The “all borrowers” terminology in question #31 is very important. Anyone applying for and receiving a PPP loan should be able to support, with clear and precise financial documentation, the need for these funds (e.g., “but for” the PPP loan we would need to furlough or fire employees). Financial projections at both an industry and micro business level must support the borrower’s certification in good faith of the need. Consider documenting monthly expense “burn rates” or creating easy-to-track expense payments that clearly demonstrate how the PPP loan funds were used during the covered period. Ask yourself, “If the SBA audited my loan transaction under today’s further guidance, could we support the need?”

If, after further consideration, the borrower decides the loan may not meet the current criteria, the borrower may pay back the loan prior to May 7, 2020, and the SBA will deem the application was made in good faith. The penalties are significant for false certifications under the PPP. Applicants should carefully review the certifications and consider the subjectivity of several aspects of the current guidance.