Recent comments from the Secretary of the Treasury, Steven Mnuchin, highlight the importance of properly documenting matters related to your Paycheck Protection Program Loan (“PPP Loan”). On April 28, 2020, Secretary Mnuchin announced that there will be a full review of PPP Loans in excess of $2 million before any loan forgiveness and that borrowers (and/or the individual(s) that make such certifications) may face criminal punishment including substantial penalties and imprisonment if they falsely certified on the PPP Loan application that they needed the funds to support operations.
Further, on April 23, 2020, and April 28, 2020, the SBA issued additional guidance in its Frequently Asked Questions regarding large businesses (public and private companies) applying for PPP Loans, stating, in part:
“[A]ll borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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.”
These comments by Secretary Mnuchin and the SBA guidance appear to stem from the recent backlash against large companies that obtained PPP Loans, but further highlight the importance for all borrowers to follow best practices and properly document matters related to the PPP Loans.
Additionally, this new guidance requires borrowers to determine whether the business has other sources of liquidity to support its ongoing operations that are not significantly detrimental to the business. The guidance initially focused on public companies with access to capital markets, but also applies to private companies. While there remains little guidance on this requirement, it is anticipated that audits would look at the size of cash reserves of the borrower, current and projected cash flows of the borrower, and the availability of capital from traditional sources. In making a determination related to other sources of liquidity, borrowers should review what other liquidity sources are potentially available and the terms and conditions of such sources.
In the event you have concerns about eligibility for a PPP Loan based on the recent guidance from the SBA, please contact us. The SBA guidance also created a safe harbor for all borrowers that applied before April 23, 2020, and repay the PPP Loan proceeds. If, in light of the new guidance, such a borrower can no longer make the “necessity” certification and the borrower repays the PPP Loan in full by May 7, 2020, such borrower will be deemed to have made the certification in good faith.
To establish and document eligibility for the PPP loan, we recommend you create journals and identify how the coronavirus pandemic has negatively affected your business, including customer account changes, supply chain disruptions, and state and local restrictions that have affected your business’s ability to operate. Further, with respect to identifying a lack of alternative liquidity options or that such options will be significantly detrimental to your business, we recommend you compile the documents, research, notes and any correspondence that you relied upon in making such a determination.
Further, all borrowers, and especially those that have or are likely to receive loans in excess of $2 million, should document and itemize the use of the PPP Loan proceeds as the PPP Loan proceeds must only be used for the following:
- Payroll costs (as defined in the CARES Act). At least 75% of the PPP Loan proceeds must be used for payroll costs. This applies both for determining the forgivable amount of the PPP Loan and to any amount not forgiven.
- Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums.
- Mortgage interest payments (but not mortgage prepayments or principal payments).
- Rent payments.
- Utility payments.
- Interest payments on any other debt obligations that were incurred before February 15, 2020.
- Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020.
To help create adequate documentation regarding the use of PPP Loan proceeds, we suggest you deposit the PPP Loan proceeds into a separate, segregated account to easily trace the uses of the PPP Loan proceeds. Additionally, we suggest each borrower keep a log or other record which shows the date, amount, and use of each expenditure of PPP Loan proceeds. In anticipation of what may be required for an audit or the forgiveness application, you should also keep copies of payroll records, invoices (i.e., rent or utility statements), and bank records.
Borrowers should also be familiar with the requirements to maximize and obtain forgiveness related to the PPP Loan, as we have discussed previously (see Maximizing the Forgiveness Amount of a Paycheck Protection Loan).
The SBA continues to issue additional guidance on PPP Loans, so the rules outlined above are subject to change.
The Business and Corporate attorneys at Dvorak Law Group understand the importance of PPP Loans to many businesses at this time and continue to monitor and review the guidance, regulations, and commentary related to PPP Loans. Please contact Dvorak Law Group for specific questions and recommendations regarding your PPP Loan or how this recent guidance may apply to your business.
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