On April 23, the U.S. Department of Treasury issued FAQ No. 31 entitled, “Do businesses owned by large companies with adequate sources of liquidity to support the business’ ongoing operations qualify for a Paycheck Protection Program (PPP) loan?”
The Treasury pointed out that borrowers are required to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
Further, they state 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 detrimental to the business. 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.”
A few days later on April 28, FAQ No. 37 was issued and raised a similar question with regard to privately-owned businesses with adequate sources of liquidity. The SBA’s response to this question was “see response to FAQ No. 31.” That same day, Interim Final Rule No. 4 was released reiterating the required certification and providing a safe harbor to avoid prosecution and potential criminal liability under the False Claims Act. The safe harbor provides that “any borrower that applied for a PPP loan prior to the issuance of this regulation and repays the loan in full by May 14, 2020, will be deemed by the SBA to have made the required certification in good faith.”
The very next day, FAQ No. 39 stated that the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate.”
What should a business do to prove PPP loan necessity?
Each business will have its own unique situation that this crisis has caused for their business to require the need for a PPP loan. Therefore, it is somewhat difficult to give specific guidance that all businesses can follow. That being said, listed here are some general recommendations to help your business document your PPP loan necessity.
- Document an income statement forecast for the remainder of 2020.
- Your forecast should include written assumptions for both revenue and expenses. Be as detailed as you can with your assumptions. For example, don’t just list the number of full-time employees you will have by month. Try to list each employee that will be onboard. This will give you a great tool to go back and evaluate against actual performance.
- Document the number of jobs that the PPP loan saved.
- Consider the potential loss of customers because of potential business closings as a result of the crisis.
- Consider the impact on business development for the remainder of the year. Most businesses make assumptions at the beginning of the year for new business. Those assumptions have now likely changed and the marketplace climate has changed for the remainder of the year. A good example here would be car dealerships. Not only will consumer spending likely change post-crisis, but how dealers will be allowed to sell cars will likely be restricted for the near future.
- Typical forecasts would be done using historical information. These are unprecedented circumstances. We recommend being cautious when referencing historical information.
- The assumptions for the forecast will require you to dig deep and really consider what will happen to your business for the remainder of the year.
- Prepare a cash flow forecast for the remainder of 2020.
- This forecast should also include written assumptions.
- You should consider doing two cash flow forecasts; the first without the PPP loan and the second with the PPP loan.
- Items to consider in this forecast are:
- Collectability of current accounts receivable;
- Change in “days outstanding” for your accounts receivable and possible timelines for extension;
- Loss of current customers;
- Extension of vendor payments (document those specific vendor payments that you will not be able to extend).
- Evaluate your liquidity options
- The term “liquidity” is not specifically defined by the Treasury or the SBA as it relates to the PPP guidelines. Therefore, we recommend that you think through all the possible avenues for liquidity. If you deem a particular option as not viable, we recommend you document why that option was not viable.
- List the types of liquidity vehicles you have available to the business along with the amount available for each vehicle.
- Incorporate the use of these vehicles in both cash flow scenarios mentioned above. This is one of the reasons we recommend doing a cash flow both with and without the PPP loan. You want to be able to show the impact this crisis would have on your business if you had to exhaust your current liquidity options.
- For bank lines of credit, be sure to consider that your bank may reduce the amount of availability or completely call your line of credit depending on the economic impact this crisis has had on your particular industry. If you believe there is a possibility that this could happen, incorporate that into how much liquidity you may have available.
- Prepare reports that show monthly performance against your “necessity” forecasts.
- Document why there are variances to each forecast and be specific. The more specific you can be on your forecasts, the more specific you can be when comparing current performance against the forecast.
- If performance exceeds what you projected in your forecast, be sure that you can identify why that happened. While this crisis will have a lot of negative impacts on various industries, it will also have unforeseen positive impacts on some industries. If you are in one of the industries that experiences a positive impact as a result of the crisis that you did not anticipate, it will be important that you are very specific as to what happened so the SBA will understand that you had no way of knowing that this event would happen in the midst of the crisis.
This is just an overview of the steps your business should take to prove the necessity of your PPP loan. These steps and processes will change depending on the circumstances surrounding your individual business and industry. Since each business and industry will have unique scenarios, we encourage you to speak with a trusted advisor for assistance when preparing this information to support your need for the PPP loan. For more information, call us at 518-459-6700 or visit us online at www.BSTco.com.