When the Small Business Administration (SBA)’s Payroll Protection Program (PPP) launched as part of the CARES Act, many not-for-profit organizations, along with other entities, rushed to submit their applications to qualify for these loans and hopefully future loan forgiveness. The sense of scarcity and urgency was high as entities were applying at the same time the SBA was working to finalize the program specifics.
As the dust is starting to settle, additional guidance and clarification being issued by the SBA may have not-for-profit organizations reconsidering their applications to this program.
This week the SBA issued an additional FAQ on the program and one question in particular is generating a lot of media attention. When entities applied for their PPP loan, they had to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” When the loan program initially launched, there was little clarity on the specifics behind this certification. In this newly released FAQ, Question #31 asks “do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”
The answer to the question specifically references public companies with substantial market values and access to capital as not necessarily meeting the criteria to qualify for a loan and as such, has led to the recent negative publicity for Shake Shack, Ruth’s Chris and other public companies who were awarded PPP loans in the first round of funding.
Of additional concern is after the initial attention and scrutiny directed at public companies participating in the PPP loan program, the spotlight is now shifting to not-for-profit organizations, particularly private schools, that may have access to other funding sources through reserves, investments, and endowments.
On May 1st, Treasury Secretary Steven Mnuchin specifically urged private schools that tapped a relief fund designed to help small businesses weather the coronavirus pandemic to return the money. This request, as well as the media attention on public companies and private schools, has led many not-for-profit organizations to question whether they should keep the PPP loans they were awarded.
When considering this decision, organizations not only need to consider the legal risk behind making a potentially false certification (which could include potential criminal liability) but also the reputational risk for the organization. Like public companies, most not-for-profit organizations have their financial information available to the public, either on their own website or through Guidestar. This access to information can lead to unwanted media attention and misinformation. Organizations have to be conscious and prepared for this possibility and proactively evaluate their risk tolerance for any negative publicity that may arise.
So how do not-for-profits organizations make a decision on how to proceed? Many legal, compliance and risk management professionals are recommending that organizations review their “case” for “current economic uncertainty” to ensure leadership, the Board and others charged with corporate governance are all in agreement. This is a gray and highly subjective evaluation for an organization but some factors to consider could be:
- Amount of operating reserves or cash on hand and the organization’s historic targets and justifications for these financial goals
- Financial data supporting the current economic environment’s negative impacts on the organization’s operations and forecasts for the future
- Evaluation of the organization’s dependency on its investments and the expected impact of capital market volatility
- Quantification of any delay or postponement under government mandates of an organization’s revenue-generating activities (i.e. programs, fundraising events, etc.)
- Composition of an organization’s endowments and what funding is available for expenditure versus what is legally required to be held in perpetuity or used for a specific purpose
- Increased need for an organization’s services during this pandemic and the expected additional future costs
- Evaluation of any outstanding promises to give and expected future collectability
- Access to other funding sources, such as a line of credit
- Firm short-term and long-term commitments and obligations the organization is unable to change
- Organization’s plans for workforce levels and whether reductions would be necessary without PPP loan funding
This “case” should include both qualitative and quantitative factors and should be documented in writing by the organization. The FAQ specifically states that entities receiving a loan over $2M, along with other loans as appropriate, will be reviewed by the SBA. The certification is likely something that will be evaluated as part of this review.
The SBA has issued a safe harbor for entities through May 14, 2020, whereby loans repaid in full by this date will be deemed by the SBA to have made their required certification in good faith. The SBA intends to also issue additional guidance before the 14th on how it will review the certification.
This is a very sensitive issue for not-for-profit organizations but one that should be considered by all organizations that received PPP funding to ensure the Board and leadership of the organization feels comfortable and in consensus regarding the organization’s need for this funding. We encourage you to seek multiple perspectives on the different factors affecting your organization, from members of the management team, legal counsel, Board and Committee members and other trusted advisors.
RubinBrown can be a member of that team and assist with the evaluation of some of the quantitative factors noted above, so please feel free to reach out.
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