PPP Loan Application and Certification of Need

The Small Business Administration’s (SBA) Paycheck Protection Program (PPP) loan application required that applicants certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA further released Question #31, providing additional guidance regarding the “need” and allowing for a return of the proceeds during a “safe harbor” period for any business that determined it is unable to meet the “need” criteria given the new guidance. Even given the original certification wording and additional guidance, the decision still remains based on judgement, facts and circumstances rather than a bright line test.

The “safe harbor” period for PPP loan returns has been extended to May 14, 2020. While this is a complex decision, there are steps that your company can take to aid in your decision-making process and to prepare for a potential future audit should one be required. It should be noted that all PPP loans in excess of $2 million dollars are expected to be audited to some degree, with additional audits of below amounts possible. Furthermore, consideration should also be given to the possibility of an adverse outcome resulting from an audit which presents a risk for future business operations and planned available resources if repayment is required.

Here are a few steps to take and factors to consider:

1. Document the uncertainty that necessitated the request for a PPP loan. Maintain revenue and budget projections and detail business opportunities that may not materialize or any other industry-specific challenges. Document, for example, analysis of when your business may reopen or return to full operating capacity. When it does, will your customers return? Has your supply chain been impacted, or will it?

2. Analyze specifically what payroll or staffing reductions would be necessary if your company did not receive the PPP loan. Include documentation supporting how you arrived at these estimated reductions. Are you bringing back employees who were furloughed/laid off as a result of the PPP loan proceeds?

3. Explain why other sources of liquidity are not available, are intended to fund normal working capital needs, or are insufficient to support payroll. If there are investments held by the corporation, consider that drawing down on these investments in a down market is counterproductive to the health of the company. Additional considerations include, if your company has substantial cash reserves, are those reserves restricted or earmarked for certain purposes? If you have an existing line of credit, are there restrictions on how it may be used or possible covenant violations that may occur given projected financial results without a PPP loan? Or if you do have other sources of funding, would they be enough to support 8 weeks of payroll and other operating expenses?

4. Detail any inability to borrow additional funds, such as a denial of a loan request or an assessment of your business’s ability to increase its debt load without substantial detriment to your business operations. You should also describe any significant business risks to using existing working capital or taking on new debt to fund business operations.

5. Consider future cash flow analysis including possible slow collectability of accounts receivable or amounts due from customers that are experiencing their own financial hardships and may not be able to remain in business and pay amounts due to you.

6. How is your business being impacted currently? Document any requests you may have received from customers to reduce fees, cancel or delay work, or actions such as delayed payments.

7. What additional steps are you taking to reduce risk or preserve capital for your business, such as reducing expenditures, reducing compensation for shareholders/owners, or drawing down existing lines of credit?

8. What negative trends or business disruption issues are your competitors experiencing that are possible or likely to also happen to your business in the future?

As it may take some time before any potential audit occurs, we recommend maintaining documentation of your analysis at this time, in support of any “need” conclusion you reach. Should you have any questions as you evaluate your next step, please don’t hesitate to contact your tonneson + co representative.