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COVID-19: PPP Loans and the Factor of Economic Uncertainty

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When the Small Business Administration’s (the SBA) Paycheck Protection Program (PPP) launched as part of the CARES Act, many organizations rushed to submit their applications to qualify for these loans and hopefully future loan forgiveness.
May 12, 2020

When the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) launched as part of the CARES Act, many organizations rushed to submit their applications to qualify for these loans and hopefully future loan forgiveness.

Last week, the SBA issued an additional frequently asked questions document (FAQ) on the program, and one question in particular is generating a lot of attention. When entities applied for their PPP Loan, the CARES Act required they certify, “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” At that time, there was little clarity on the specifics behind this certification. In the newly released FAQ, question #31, also referenced in question #37, asks “do businesses owned by large companies or private companies with adequate sources of liquidity to support the business’ ongoing operations qualify for a PPP loan?”

After the initial attention and scrutiny directed at public companies participating in the PPP, organizations are rethinking whether they should keep their PPP Loan.

When considering this decision, organizations not only need to weigh the legal risks behind making a potentially false certification (which could include potential criminal liability), but also the reputational risk for the organization. Historically, recipients of SBA 7(a) loans have been published for public review. Access to this list of names can lead to unwanted media attention and misinformation. Organizations have to be conscious of and prepared for this possibility, and proactively evaluate their risk tolerance for any negative publicity that may arise.

What should an organization do to make the decision for keeping the PPP Loan? Many legal, compliance and risk management professionals are recommending that organizations review their judgment for “current economic uncertainty.” This is a subjective evaluation for an organization, but some factors to consider could be:

  • Amount of working capital or free cash flow and the organization’s historic targets and justifications for these financial metrics
  • Sensitivity analysis to measure the financial impact (before and after projections) of the current economic environment’s negative impacts on the organization’s operations (cancelled contracts, strategic plan pivots, extended shutdowns, etc.)
  • Quantification of any delay or postponement under government mandates
  • Increased operating costs for service delivery and employee health and safety during this pandemic and the expected additional future costs to meet changing municipal orders
  • Cash collections and expected future collectability of new sales
  • Access to other funding sources, such as a line of credit, and what this will do to current financial ratios needed for covenant compliance
  • Short and long-term commitments and obligations that the organization is unable to change
  • Organization’s plans for workforce levels and whether reductions would be necessary without PPP Loan funding

Organizing this impact analysis in a memo to the Loan File will ensure that all factors are recalled when asked (or audited). Recall that the FAQ specifically states 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 these 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 also intends to issue additional guidance before the 14th on how it will review the certification.

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, such as cash flow modeling and sensitivity analyses, so please feel free to reach out to us.


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