Uncertainty v. necessity: Finding clarity in the PPP fog
Updated May 8, 2020
About a week ago during a manager meeting update, one of those famous phrases from the Star Trek series came rushing to my mind — “She canna take any more, Cap’n!” No kidding. It feels that way for pretty much all of us.
The conversation that brought Star Trek’s Scotty to mind surrounded the Paycheck Protection Program (PPP) and the recent announcement from the Small Business Administration (SBA) and the United States Treasury that the rules about qualifying for PPP had changed.
Media outlets have reported an uproar about some publicly traded companies that received significant PPP funding. In response, on Thursday, April 23, the SBA sent an important message that PPP is not for larger small businesses that have adequate sources of liquidity and access to capital markets. On Tuesday, April 28, U.S. Treasury Secretary Steven Mnuchin stated that any business that received $2 million or more in a PPP will be audited by the government. In addition, the SBA issued FAQ No. 37 on April 28 (referring to FAQ No. 31), which provides that businesses able to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business are not eligible to receive a PPP loan. No guidance has yet been provided on what is or is not “significantly detrimental to the business.”
Now, most of us are affiliated with privately held companies, not publicly traded, which are more likely to be a small business. However, if you read the information in the SBA’s FAQ No. 31, it is important to highlight the language on the certification area of the application; specifically, “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” There are two key words: uncertainty and necessary.
Let’s break those down.
Uncertainty: Here’s an easy test for whether your company, regardless of size or ownership structure, meets the criteria for current economic uncertainty. Test: Are you a breathing human on the planet Earth? Check. Criteria met. Companies rushed to their banks to apply for the program like the “forty-niners” and miners headed for the gold rush.
Necessary: This one is much trickier. Meeting the “necessary” standard could pose a challenge for some businesses. The government has still not given clear guidance on who is deemed to meet this portion of the certification. This is a completely gray area. For the PPP there is no bright-line test. Yet, the business is certifying that the current need (through presumably June 30) is real.
If a company believes it will not be able to meet the above criteria, the SBA has stated that borrowers that applied for the PPP loan prior to the SBA’s updated FAQ No. 31 on April 23 and FAQ No. 37 on April 28, and pay it back in full by the original date of May 7, 2020, will be considered by the SBA to have made the certification in good faith.
However, on May 5, the SBA announced a one-week extension, to May 14, if an applicant wants to repay a PPP loan and take advantage of the safe harbor on certification. In addition, in its FAQ No. 43, the “SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.”
If the certification is found not have been made in good faith, there are potential civil or criminal penalties that could apply. Further, as noted above, Treasury officials have stated that all companies that received PPP funds of $2 million or more will be audited. There is speculation that companies that received between $750,000 to $2 million may be randomly selected for audit.
Now, companies that received the funding face a decision as to whether to keep and use it over the eight weeks following its receipt, as required by the program, or return it.
For some companies, there is no question as to what should be done. For example, one manufacturer I spoke with reported that April volume is down by over 90 percent compared to last April. Reserves and access to capital are limited. They need the money to not only continue their employees’ compensation, but to cover rent and utilities.
Another company I know in the travel and hospitality industry is also down over 90 percent. The restaurant, lodging, and tasting room are closed and the convenience store’s retail business is down. However, they are using the downtime as an opportunity to invest in their facility. The restaurant needed a makeover, so they are remodeling it while under safer-at-home orders. Certifying that PPP dollars were “necessary” for that company could, on its face, be dicey since they had access to capital to fund the makeover.
Other companies quickly shifted their workers to a work-from-home model but have not seen their current volume plummet.
We’ve heard many business owners exclaim that their needs for funds right now isn’t acute, but come summer, if volume doesn’t return to normal, they will need it then. Consider the seasonal businesses that hire employees in late May in anticipation of summer volume. Their “need” in the months of March through June is much lower than the summer months. While the PPP funding would be beneficial, does it make sense to get/keep it if it won’t be used in full by June 30 per the program requirements?
The current environment has placed a great deal of stress on decision-makers. Conceptually, the intent of PPP is to protect employees’ pay, yet the various programs and lack of definitive guidance has made for very dense, foggy skies.
When in the fog, it can be hard to know what direction to go: Should I apply for/keep PPP and call my employees back? If employees are receiving more benefits under the higher unemployment compensation, should I even take/keep PPP as it will result in those same people receiving less money in their pocketbooks? When restrictions are lifted, should I reopen and call my employees back? What should I do?!
I wish I had the answer for you, but I can’t make that call. Only you, dear business leader, can assess your own situation and determine if you can justify your certification on the PPP application (assuming you received funding). Only you can make the decisions and move forward.
Yet, there is a litmus test that may help with decision-making during this time of uncertainty: What is the right thing to do — the right decision for the business?
For example, if you went to a shareholder meeting at the beginning of April, PPP aside, and said, “Hey guys! I can get a $XXX super-low interest loan that will help us with payroll, rent, and utility expenses for the next eight weeks,” what would they say? Would they have looked at you as if you had four heads and a spiky tail, or would everybody intuitively have known it made good business sense?
If you were fortunate to able to continue working through March and April, you may have continued to make hay while the sun was shining. Setting the potential forgiveness aside, there may have been no need for an operating loan to use in April through June.
Another example is the manufacturing company mentioned earlier. In talking to the owner, recovery to the volumes of the past will be slow given the industries it serves. The company needs, received, and is using the PPP funds to maintain its payroll even though there is no work to be done. Yet, it’s agile and when it comes back, it will start manufacturing products that have greater demand. When should they call employees back and which employees should they call? Should other employees be laid off if there isn’t involvement in the new product line?
These are tough decisions but they are not impossible ones. What is the right thing to do? The owner knew the answer but needed to talk it through with someone as a sounding board, bolstering their courage to do what needs to be done.
Uncertainty remains front and center for us all. Current economic need, however, varies. If you were fortunate enough to receive PPP funding, call your banker and talk through how the change in the certification criteria impacts your situation and if it would be advisable to return the funds. If yes, be mindful of the May 14 deadline noted above. Even if it’s past May 14, call and talk to them as this is an ever-evolving situation with no definitive guidance on how “necessary” is defined. Acting in good faith is always good, regardless of the date set by the SBA.
While skies are still foggy, we’re still on the road. Use the litmus test. Make the tough decisions about what to do. As discussed in my prior blog post, you’ll feel better once you do and you’ll be on the path, moving forward.
Stay healthy, y’all!
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