You Received a PPP Loan. What’s Next?

The latest CFO|Circle call was for CFOs and other finance leaders that have received PPP loans. The purpose of the call was to discuss the loan forgiveness provisions under the CARES Act and the latest PPP developments.

Adam Steinberger + Michael Barrett + Dennis Minich of Andersen Tax alongside Kevin Grumberg of Goodwin joined to describe the parameters for determining the amount of a PPP loan that can be forgiven and discuss the various implications of accepting these loans.

Paycheck Protection Program (PPP) Update

The first round of PPP funding opened on April 3 rd and closed quickly on April 16th. The second round opened Monday, April 26th and so participants still have the opportunity to apply. This round is expected to close even quicker. Guidance from the public arena is still poor, and this applies to forgiveness. The proceeds have to go to a permitted activity and be deployed within 8 weeks of receipt.

While there has been little to no scrutiny on the part of banks when getting a loan, we expect much more scrutiny when it comes to loan forgiveness.

Understanding the eligible uses of PPP 

At least 75% of PPP proceeds must be used for payroll costs, this is required for all participants as well as for those seeking loan forgiveness. Though this detail wasn’t directly mentioned in the statute, an FAQ with the SBA revealed this rule stands.

Payroll Costs include:

• Salaries – though capped at an annual salary of $100K
  • Companies can still expense payroll for those making more than $100K, but only for the permissible/forgivable amount
  • The cap should be looked at on a week-by-week basis, so the permissible amount per employee is $15,385 over the loan period ($100K / 52 weeks x 8-week loan tenor)
• Bonuses – though they apply to the $100K cap
• Severance or “Allowance for Separation” – though this may impact forgiveness if you don’t meet headcount requirements/salary requirements
• Payment for vacation, parental, sick leave, family leave, and retirement benefits 
• Some state taxes

Other Permissible Uses (outside of the 75% used for payroll):

• Interest coverage on 3rd party debt
• Compensation beyond annual salary of $100K 
• Rent, mortgage payments, utilities

Total Loan Proceeds That Qualify for Forgiveness

Only a small subset of permissible uses are actually forgivable uses. While full guidance hasn’t been disclosed, here is a summary of what we know.

Forgivable proceeds can be cut if there’s a reduction in the average workforce from Feb 15th through June 30th, 2019 or the same period in 2020. Exceptions to the reduction rules exist, for example, if they are re-hired by June 30th or if pay is increased to prior levels.

Forgivable uses:

• Payroll expenses below annual salary of $100K

• • Cannot reduce someone’s salary beyond 25%, so furloughed employees will not be included in headcount total
  • If you get to the same headcount and same pay level then you won’t be reduced by the headcount/salary requirements

• Rent, mortgage payments, utilities if they existed before February 15th 

It is recommended that CFOs set up a separate account for loan expenditures, as the less time banks have to spend on approving forgiveness the better.

Documentation Required to Receive Forgiveness

The only guidance supporting loan forgiveness is in the statute of the CARES Act.  The statute indicates that a borrower seeking loan forgiveness will be required to provide the lender:

1. Documentation verifying the number of full-time equivalent employees on payroll and their pay rates for the periods between (a) February 15, 2019, and June 30, 2019, and (b) January 1, 2020, and February 29, 2020, including:

• Payroll tax filings reported to the IRS
• State income, payroll, and unemployment insurance filings

2. Documentation, including canceled checks, payment receipts, bank account transcripts, or other documents verifying payments on eligible mortgages, eligible leases, and eligible utilities.

3. Certification from an authorized representative of the company that:

• The documentation provided is true and correct
• The amount for which forgiveness is being requested was used to retain employees, make payments of interest on eligible mortgages, eligible leases, and eligible util

4. The statute also states that a borrower will not receive forgiveness without submitting the documentation listed above to the lender

Documentation Required to Support an Audit

Formal audit procedures have not been issued.  FAQ #39 indicates that guidance will be forthcoming. However, in addition to the documentation listed above, we expect a best practice is for companies to organize the legal documentation that supports the existence of an eligible mortgage, lease, or utility liability or expenses.  Adequate bank records will be key to supporting use of the PPP loan proceeds.  It is a best practice to segregate PPP funds from other cash balances in order to provide clear tracking of how the PPP loan proceeds are used. 

FAQ #39 clearly indicates the Department of the Treasury’s intent to audit borrowers’ necessity for the loan as well as each borrower’s other sources of liquidity to support ongoing operations that are not significantly detrimental to the business.  It is unclear how they will make this assessment.  As Kevin Grumberg from Goodwin explained during our meeting, it is prudent for companies to document the economic need for the PPP loan.  This may include convening a special meeting of the Board of Directors.  Attorneys like Kevin should be involved in this discussion.

What scope and level of potential audits should my company prepare for?

Based on indications from the Department of Treasury and the Small Business Administration, we expect that there will be different levels of scrutiny that depend on (1) the amount of the PPP loan and (2) whether the borrower applies for loan forgiveness.  Borrowers who received PPP loan in excess of $2 million should be prepared to come under greater scrutiny (FAQ #39).  Scope of the audits may include:

• Borrower’s certification that economic uncertainty makes the loan necessary to support operations while taking into account business activity and access to other sources of liquidity (FAQ #31)
• Substantiation of the average monthly payroll costs used to compute the amount of the PPP loan to request
• Substantiation of the permitted expenses and employment criteria included in the application for loan forgiveness (listed above)

It will be very important for any borrower to demonstrate and document the need for the loan as well as a lack of other sources of liquidity.

Is Mnuchin just saber-rattling or will the Treasury put serious auditing resources against this program?

In Round 1 of the PPP lending program, the SBA guaranteed over 1.6 million PPP loans totaling over $342 billion.  Just under 26,000 of the PPP loans approved were in excess of the $2 million audit threshold announced by Secretary Mnuchin.  

The effort to audit all of these loans would be substantial and we provide this data as context for the scale of this audit mandate.  There has not been any indication of the resources being allocated to or the scope of this effort. Congress has also indicated an interest in who has taken loans.  It would appear that, regardless of the size of the loan, there may well be a disclosure of all companies who borrowed money under the program.

Consequences of Accepting PPP Loans When Other Funding Sources Are Available

There’s no silver bullet. Your valuation, your investor base, and your revenue scale have nothing to do with whether you qualify for the loan and loan forgiveness. 

Given vague guidance, it’s important to be thoughtful and do your diligence before accepting the loan. Be honest regarding whether the company has a reasonable chance to get funding from current investors, new investors, commercial banks, etc. Having the PPP equivalent of a “note from the doctor” may also be valuable down the road, likely in the form of a declined term sheet by insiders who aren’t willing to further finance the business.

The only bright-line rule is that anybody who borrowed more than two million and seeks forgiveness will be audited. 

Legal Risk

Are nuisance litigators likely to go after private companies or just public?

We are not expecting that private companies will be insulated from nuisance litigation. The government has announced that the names of all program participants will be made publicly available, and from there a plaintiff’s lawyer can readily determine which private entities may be connected to deep-pocketed investors, for example.

I’ve heard there is a risk of plaintiff’s lawyers seeking a whistleblower at a company to sue for violating terms of the PPP. Any validity to this risk?

Plaintiff’s lawyers are not empowered to bring the kind of litigation discussed alone, they need to bring it on behalf of a plaintiff (or a ‘relator’, as plaintiffs are called under this program) who must generally have direct and independent knowledge of the alleged violation of the PPP terms.  A lawyer could target a company to try and find a relator, or a relator could equally seek out a lawyer independently to make the claim (this is often a disgruntled former employee)

Exploring the Impact of Public Disclosure of Having Received PPP Loans

The government has definitively announced that the names of all program participants will be made public. They have also said that amounts will be made public, but it is unclear if this will be disclosed on a participant-by-participant basis, on an aggregate basis, or otherwise grouped or classified. 

At a base level, if you’re found to have made a good faith belief in applying for this program, but it turns out you were wrong and you shouldn’t have applied to begin with, what you’ll be asked to do is pay back the loan even if you’ve achieved forgiveness. For most, that’s an acceptable level of risk worth taking.

If you’re found to have acted in bad faith, or if there’s a whiff of that, then you’re brought into the False Claims Act, which is an existing federal law that just generally speaks to abuse of federal programs. And for that, you’re looking at triple damages, plus potential fines for each individual representation of a five-figure nature. This is where people get concerned. 

History is probably going to look very different on people who borrowed it at cheap forgiveness versus people who borrowed and didn’t pay.

Given this, doing your diligence to establish that you have a good faith basis that you have a true need here can do a lot to insulate you from liability, both legal and reputational.

[Additional Resources]

By Andersen:

Here you will find a chart by Andersen that provides general information related to the forgiveness of loans under the PPP

By Goodwin:

Here you will find compilated slides by Goodwin to help further understand the use of proceeds and loan forgiveness. The slides cover:

• Permitted Uses of Proceeds for PPP Loan
• Forgive-able Uses of Proceeds for PPP Loan
• Recapping and Unpacking ‘Payroll Costs’
• Forgiveness Reductions Practical Advice