Evaluating the Current Economic Uncertainty Certification on Your Payroll Protection Program Loan Application
There have been numerous questions about the recent guidance from Treasury (in the form of Frequently Asked Questions) regarding a company’s “need” for a Payroll Protection Program (PPP) loan. To this end, large companies have returned their loan proceeds to the banks (as discussed below), and Treasury Secretary Steven Mnuchin has announced (as confirmed in FAQ #39) that all loans in excess of $2 million will be audited. These factors have businesses concerned about whether they are actually eligible for the PPP loan for which they applied and may have already received. This article is intended to help a business evaluate various factors in order to come to its own conclusion regarding its eligibility for a PPP loan.
The certification on the PPP loan application states: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” FAQ #31 indicates that “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.” The conclusion in the FAQ indicates that it is unlikely that a public company with substantial market value and access to capital markets can make the aforementioned certification in good faith.
FAQ #37 indicates that the certification applies to private companies as well as to public companies.
Overall, the guidance appears to indicate that a key element in determining whether a borrower can make the aforementioned certification in good faith is whether it has adequate sources of liquidity to support its ongoing operations, without which the business would be harmed.
Businesses that cannot make this certification in good faith have until May 7 to return any PPP loan funds they may have received without any penalties, if the business determines that it is not eligible for the loan based on the required certification.
While the guidance provides some assistance to borrowers in determining whether they qualify for the PPP, it still leaves many questions unanswered. Ultimately, the specific facts and circumstances of each borrower will determine whether the certification can be made in good faith. To this end, Marcum provides the following questions to consider when evaluating your company’s response to the certification from both a qualitative and quantitative standpoint.
For the qualitative analysis, we recommend you document your thought process during the period leading up to your application for or receipt of the loan. Some clients are keeping logs of their decisions and how they may have changed as the world around them has changed. Your documentation should consider the following:
- What do I expect to happen?
- Nobody’s crystal ball is perfect, but what are the scenarios I can predict?
- What is my best-case scenario, my worst case, and in between?
- Are there disruptions in my supply chain?
- What if my workforce is reduced because of exposure / potential exposure to COVID-19?
- What is happening in my industry?
- What is happening in my region / state?
- What is the risk to my business of taking or not taking the loan?
For the quantitative analysis, evaluate your current business operations, current liquidity, and access to other sources of funds. Model out various scenarios that show the short-term and long-term impact to the business. You can include taking the PPP loan and not taking the PPP loan in each scenario. The outcomes of each scenario can help you determine the economic and financial impact so you can see on paper whether the impact is significantly detrimental to the business.
Consider the following and include in your models:
- How is my business currently doing?
- What do my projections look like for the rest of the year?
- What is my current cash position?
- What do I expect cash flow to look like?
- When do I expect to collect my receivables?
- Do I expect my customers to purchase and pay at the same rate as normal?
- What does my backlog look like?
- Can I draw down on an existing revolving line of credit?
- What access do I have to other debt?
- How would repaying new debt impact my business in the long-term?
- What is my current equity position, and is it liquid?
- What other sources of capital are available to me, such as contributions from owners?
- What is the likelihood of owners contributing more capital based on their specific circumstances?
- Do I have the ability to raise capital from outside investors? How long would that take?
- What would happen if I had to close because my team has COVID-19?
- What if I had to close one or two of my stores, but others stayed open?
Ultimately, you will have answers on both sides of the question as to whether or not you need a PPP loan to support ongoing operations. You can compare the answers in both categories and weigh the risks inherent in either taking or not taking the PPP loan. We also recommend that you consult with your attorney to support your conclusions since the PPP application is a binding legal document.
No guidance yet exists on how the government will evaluate and test the certifications made on the PPP application. However, having a well-documented qualitative and quantitative analysis can substantiate that you acted in good faith based on the best information available to you at the time. Whether the result is that you determine that you should return your PPP loan by May 7 or keep it, you will know that you put in the appropriate effort to answer that question. The more you can support your ultimate decision, the better your position will be in case of audit.
Your Marcum team is here to help you. We are happy, willing, and able to assist you with walking through this type of analysis so you can make the appropriate determination. Reach out to your Marcum team, a member of Marcum’s SBA Task Force or email firstname.lastname@example.org
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