Over the last many weeks, we have been fielding questions from many clients about the CARES Act – especially the loans available for small businesses that we outline in our Coronavirus Resource Center.  I actually co-wrote an article back in March with Jennifer Mailhes, CPA from Doeren Mayhew entitled “Five Things Small Businesses Should Know About the COVID-19 Disaster Loan Relief”. 

In that article we discussed the Paycheck Protection Program (PPP) Loans, how they work and how they can actually be both a lifeline for businesses while keeping many of their employees on payroll – protecting families as well.

However, like many Government loan programs, the devil is in the details.  For the PPP loans, the business owner makes certifications as to the busyness necessity for those loans.  I recently got back with Jennifer to discuss how best to document your necessity to help support loan forgiveness from the prospective of a CPA.  This week, the SBA Just gave new “safe harbor” guidance for those with PPP loans under $2 million as well saying that small businesses with loans at that level and below were assumed to have certified in “good faith”.

After reading the information below, you should also consult with your attorney.  The following is a summary of those discussions:

SBA Guidance on Documenting Your PPP Loan Necessity

The Small Business Administration (SBA) recently published new guidance on the certification rules for the famous Paycheck Protection Program. The new guidance, in the form of FAQs, which is regularly being updated, answered many lingering questions for borrowers, but also changed the playing field for some businesses.

When the PPP program was initially rolled out, the Treasury Department and the SBA provided general guidance as quickly as possible for businesses to gain access to the much-needed funds to help sustain business during the COVID-19 pandemic. However, not all items, were addressed, leaving a broad subjective interpretation open to those borrowers who certified in their PPP application that their current economic uncertainty made the loan necessary.

Is Your Loan Necessary?

In recent days, the term “necessary” has been put to the test. This comes on the heels of several high-profile cases hitting the media, including some well-known publicly traded companies and not-for-profit organizations that secured a PPP loan even though they had access to capital from public financing or large endowments.

The SBA provided answers about certifying the need for the loan in the recent guidance. The FAQ response indicates all borrowers must assess their economic need for a PPP loan under the standards established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the PPP regulations at the time of their loan application. Additionally, it states while ordinarily the SBA requires a borrower to demonstrate they are unable to obtain credit through other means, the CARES Act suspends this requirement for PPP loans. However, borrowers still must certify in good faith their PPP loan request is necessary. Before submitting a PPP application, your business should consider its current business activity and ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.

Obviously, many public companies with substantial market value and access to capital markets will likely not be able to make the required certification in good faith. Unfortunately, this implication is not limited solely to publicly traded companies and applies to all companies applying for PPP loans. All non-public companies should go through the exercise of evaluating whether they can support their position that there was economic uncertainty and it was necessary for the business to request the PPP loan to support its ongoing operations.

Since there is currently no formal guidance on what the considerations are for “economic uncertainty”, our business advisors have a few recommendations for things you should consider documenting to support your need for the loan.

  • Best practices for determining your business’s current activity should include a rolling monthly forecast. Use your best judgement as there is still much uncertainty on reopening guidance and restrictions that will be put on businesses in the weeks and months to come to avoid another surge of COVID-19. Consider issues you might encounter with your day-to-day operations, workforce, supply chain, hours of operations and key customers. You should begin documenting the projected impact of various scenarios now to help validate your loan.
  • Retain your support for current delays in payment from your customers or evaluating how much of your customer base was or is still currently closed.
  • Scenarios you considered for terminations or cost reductions prior to getting a PPP loan – even if you didn’t take these actions this should be saved as part of your evaluation. 
  • Any leading indicators available should also be retained. If your business has a longer lead time from quote to collected cash, then you may be seeing less of an impact today, but know you would need to reduce payroll now if your quote volume is down to plan for the future decline in sales. Keep a log of these types of issues, so you can provide support, if needed.

Safe Harbor Rules

Companies that received a PPP loan and are concerned their current business activity could be challenged or have some question about their ability to access other sources of liquidity based on this guidance are provided with an option to avoid potential legal liability. Any borrower that applied for a PPP loan prior to the issuance of this guidance, but believe their loan perhaps was not justified based on the new guidance, can repay the loan in full by May 14, 2020 and it will be deemed by the SBA to have made the required certification in good faith.

Review Process

Both the SBA and the Treasury Department have announced it will be taking a closer look at any PPP loans over $2 million, in addition to other loans as appropriate, following the borrower’s submission of the forgiveness application, to ensure PPP loans are limited to eligible borrowers in need. Additional guidance implementing this procedure will be forthcoming.

Due to the new guidance, your management team likely needs to quickly reassess its need for the PPP loan to meet the May 14th repayment deadline.  Consult with your legal counsel if you are unsure if you will need to repay the PPP funds. Both Avidian Wealth’s financial planning team and Doeren Mayhew’s business advisors stand ready to assist your business today.


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