Questions Businesses Need to Address to Support PPP Loan Certifications

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act which established the Paycheck Protection Program (PPP), a loan program intended to provide loans to small businesses impacted by COVID-19.

In our article published April 24, 2020 entitled “SBA Issues PPP Loan FAQ which Narrows Certification Criteria for Small Businesses” and in our April 17, 2020 webinar entitled “Maximizing Forgiveness – A Panel Discussion on Loan Forgiveness and Payroll Protection Program Loans,” we highlighted the need for PPP loan recipients to create a contemporaneous “living document” which maps out the facts, circumstances, and rationale supporting the applicant’s loan certifications.  This document should support the applicant’s certification that the PPP loan is necessary based on information available from the time of application through forgiveness.  As further guidance is released by the SBA which clarifies the intent and interpretation of the CARES Act, the borrower should update their documentation accordingly.

The importance for borrowers to reevaluate and document the rationale for the their PPP loan was emphasized further by U.S. Treasury Secretary Steven T. Mnuchin and SBA Administrator Jovita Carranza’s joint statement on April 28, 2020 that the U.S. Treasury Department will "review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.”  The statement went on to indicate that regulatory guidance implementing this procedure will be forthcoming.

Provided below are sample questions which borrowers should address in a written document supporting that PPP loan certifications were made in good faith.  We recommend outlining responses contemporaneously in a journal format that can be appended over time as further guidance becomes available and relevant facts and circumstances evolve.

Impact on Business Operations

• What federal, state, and local executive orders, guidelines, and mandates governing the COVID-19 response were/are in place at your primary business operation location(s), and how have these impacted the way you typically do business?
• Are some or all employees able to continue their job functions remotely?
• Did your business experience a decreased volume of customers/clients/patients (depending on your industry) due to COVID-19 social distancing and “stay at home” orders?
• Is your industry subject to a professional governing body that further restricted your ability to operate (i.e. dental, medical, etc.)?
• Is there anything about the nature of the business’ operations that particularly limited operability due to COVID-19? Examples would include businesses/organizations such as restaurants, churches, entertainment venues, certain dental and medical practices, nonessential retailers, etc.
• If employees were laid off or furloughed, are there plans to bring some or all of them back once restrictions begin to be lifted? How might their ability to perform their job duties continue to be impacted in the coming weeks or months?
• Prior to COVID-19, did the business have plans to expand, and how have these expansion plans been adjusted in light of COVID-19?

Impact on Business Profitability

• As a result of COVID-19, does the business have a significant current or projected short-term revenue decline, or have multiple customers contacted the business to warn of potential declines in spending in the near-term?
• Prior to the PPP loan announcement, was the business considering a furlough or layoff plan for employees?
• Did the company furlough any employees and were plans made to bring some or all of them back after PPP funding was secured?
• Has the business reduced employees’ salaries/wages as a result of COVID-19? How have salary reductions been determined?
• How have salaries of individuals earning in excess of $100k/year been evaluated?
• Has the business made plans to restore reduced salaries/wages as a result of the PPP loan?
• What has the overall economic impact been to others in your industry? Have your competitors laid off or furloughed employees?
• Is the business operating in an industry where there is a lag between an economic downturn and an actual impact on the businesses’ profitability? If so, how has the availability of the PPP loan program impacted the businesses’ planning for the later effects of COVID-19 on profitability?
• Has your business made cuts to spending in light of COVID-19? Has COVID-19 impacted your business’ ability to pay its bills and vendors?  What expenditures are being prioritized?
• Have financial forecasts been prepared, and do these support the need for PPP loan funding?

Impact on Cash Flow and Access to Capital

• Was any cash in the business account being held for future expenditures or purchases (management bonuses, inventory buyback, capital expenditures, etc.)? Have plans for this cash been reevaluated in light of COVID-19?  How so?
• Has the PPP loan program been a deciding factor in whether employees are furloughed (or rehired in the case of businesses who already furloughed/laid off employees)? Was it not for the PPP loan, would the business have needed to borrow money or have owners contribute funds for the sole purpose of meeting payroll, with little to no business benefit due to the impact of COVID-19 on operability?
• How has the frequency and amount of owner dividends/distributions been impacted by COVID-19? Were there any owner dividends/distributions during the period where PPP loans were being used?  If so, what is the rationale for doing so?  Does the business expect to reduce owner dividends/distributions in the future due to the impacts of COVID-19?
• Were there any owner contributions prior to or during the PPP loan covered period? What was the purpose of these contributions?
• Does the business have marketable investments, and, if so, would the business have been required to sell them at a loss to cover business cash flow needs given current market conditions?
• Does the business have other potential sources of liquidity, and are these sources of liquidity sufficient to meet the businesses’ cash flow needs in light of COVID-19? Would utilizing these sources of liquidity for payroll be significantly detrimental to the business?  Why or why not?
• What other major sources of capital does the business have? Has the business considered utilizing these capital sources to support the business’ cash flow needs?  Why or why not?
• What types of debt, if any, did the business have prior to COVID-19? What borrowing options are available to the business, and did the PPP loan enable the business to avoid borrowing funding with less favorable terms?
• Has the business recently applied for additional credit, and was the application approved or denied?
• To the extent a recent application has been made with a lender, was the information provided under the PPP loan application consistent with that of other loan applications?
• Have customers been delaying payments beyond what is typical? If so, what is the forecasted cash flow impact?

General Considerations – Related to Definitions in the CARES Act & SBA FAQs

• How does the company interpret the certification included in the Act: “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
  • What is the borrower’s “current business activity”?
• What was considered as an “other source of liquidity,” and how was the determination made of whether it was sufficient?
• How did the borrower determine what is considered “significantly detrimental” to the business?