Factors to Consider Now That You Have Received or Been Approved for a PPP Loan

Len Fishman and Kyle Gordon of BBH Corporate Advisory & Banking discuss how borrowers are affected by new developments in the Paycheck Protection Program.

Brown Brothers Harriman (BBH) continues to monitor changes to legislation and program rules under the CARES Act and Paycheck Protection Program (PPP). The details discussed in this article are accurate as of May 13, 2020.

As many companies have received Paycheck Protection Program (PPP) funds or been notified that their application has been approved, business owners are shifting their focus to their responsibility as a PPP borrower. Additional guidance from the Treasury has clarified certain questions and introduced new ones. At the same time, headlines continue to report companies that have elected to pay back these loans. Our conversations with business owners about the PPP largely fall in three categories:

  1. Understanding revised eligibility standards following Treasury Secretary Mnuchin’s comments and the Treasury’s publication of FAQ 31, 43, 46 and 47
  2. Assessing what a borrower should do, as new guidance – FAQ 31 notwithstanding – suggests modifying the borrower’s loan or loan application
  3. Interpreting the Small Business Administration (SBA) guidance to maximize loan forgiveness

1. Understanding PPP eligibility and considering loan repayment given recent guidance

The Treasury’s FAQ 31 introduced ambiguous language compelling business owners to reconsider their eligibility according to a demonstrated need standard. The FAQ ignited concerns of possible penalties. Fortunately, on May 13, the Treasury published FAQ 46, which indicates that borrowers who receive loans less than $2 million are deemed as satisfying the necessity criteria, and borrowers who receive loans greater than $2 million will be subject to audit and if deemed to be ineligible will not be subject to penalties, provided they repay the loan. See a quote from FAQ 46 below:

“When submitting a PPP application, all borrowers must certify in good faith that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. …

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. … If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”

For borrowers with loans greater than $2 million, FAQ 46 reiterates the message of FAQ 31 that borrowers must assess their economic need for the PPP loan, specifically the certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” FAQ 31 states that “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 no significantly detrimental to the business.” FAQ 47, posted on May 13, extends the safe harbor period to repay the loan to May 18, 2020.

When considering “economic uncertainty” impacting the business and “economic need” for the loan, borrowers who received more than $2 million should be prepared to justify their good faith certification to apply for a PPP loan. It is important to document the factors causing such uncertainty or need. Examples include:

  • Financial projections reflecting material declines in revenue and profitability due to COVID-19
  • Plans to reduce expenses, capital expenditures and labor costs evidencing that PPP loan forgiveness would allow the retention of personnel
  • Documentation from customers, vendors or suppliers that illustrates lost, written-down or delayed revenue, interruptions to the supply chain or a deteriorating sales pipeline
  • Financial analysis illustrating impacts to cash flow, the riskiness and terms of additional debt or equity, as well as business risks of using existing working capital (including cash)
  • Assessment of uncertainties facing the industry and the business

Lastly, the SBA has rejected Freedom of Information Act requests to release borrower records so the agency can focus on processing loans. However, business owners should expect that this information may be made public in the future. While unrelated to FAQ 31, some business owners may consider the public relations implications of receiving a forgivable loan undesirable.

2. Application of new rules published after submitting a loan application

Since lenders started accepting PPP applications on April 3, the SBA has posted several updates to the regulations governing the program on a weekly basis. FAQ 17, published by the Treasury on April 7, addresses borrowers’ concerns on how these updates – FAQ 31 notwithstanding – could impact their loan or application. In short, borrowers and lenders are not required to revise their applications based on rules posted after an application is approved. If an application has been submitted but not yet approved, borrowers may revise their applications based on clarifications provided from new SBA guidance.

Some updated rules that borrowers are seeking further clarification on include the payroll cost calculation, required information from every owner of the business with over a 20% ownership stake and details of the affiliation rules.

3. Maximizing loan forgiveness

When the SBA published its Interim Final Rule (IFR) ahead of allowing banks to begin processing applications, it noted that “the SBA will issue additional guidance on loan forgiveness.”1 The following table based on the CARES Act and the SBA’s IFR summarizes key information that the SBA has published related to loan forgiveness.

Cover Period
  • Eight -week period after loans are received
Forgivable Expenses
  • Forgivable expenses may not include the loan amount and include:
    • Payroll costs (see below for full detail or eligible payroll costs)
    • Interest payments on a mortgage obligation on real or personal property
      in effect before February 15, 2020
    • Rent under a lease in force between February 15, 2020
    • Utilities (electricity, gas, water, transportation, telephone or Internet service)
      in effect before February 15, 2020
Eligible Payroll costs
  • Includes salary, wages and tips up to $1,000 of annualized pay per employee
    (equivilant to maximum of $15,385 per individual for an eight-week period)
  • Covered benefits for employees:
    • Healthcare expenses
    • Employer-paid 401(k) matching contributions
    • Employer-paid state and local taxes on payroll 
Loan Forgiveness Reduction
  • Headcount reductions: The loan forgiveness amount will be reduced pro rata for 
    any reduction of full-time employees (FTE) during the covered period compared to the 
    above average number of FTEs in either period of the following periods: 
    -February 15, 2019 to June 30, 2019
    - January 1, 2020 to February 29, 2020
  • Wage reductions: The loan forgiveness amount will be reduced on a dollar-for-dollar basis
    for any reduction of more than 25% to an employee's wages relative to the employee's wages
     in the quarter prior to the PPP loan.    
    Only applies to employees with an annualized salary less than $100,000.
  • Non-payroll expenses will be capped at 25% of forgiven loan amount
  • Reduction is employment or salary that occur between Feb. 15, 2020 and April 26, 2020 will
    not reduce the loan forgiveness in the borrower eliminates the reduction by June 30, 2020.
  • FAQ 40 states that laid-off employees whom the borrower offered to rehire, at the same
    compensations level, will have no impact on the loan forgiveness reduction calculation
     if the employee rejects the offer of re-employment. 

Borrowers can submit a request for forgiveness to the lender servicing the loan that includes documents verifying the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. The borrower will need to certify that the documents are true and that funds were used to keep employees and make eligible mortgage interest, rent and utility payments. Thereafter, the lender must make a decision on the forgiveness within 60 days.

While we expect more procedural detail in additional guidance that remains forthcoming, some of the key questions on which borrowers are waiting for clarification from the Treasury and the SBA include:

  • Describing forgivable expenses that are “incurred and paid” during the covered period seems appropriate for cash basis accounting, but how should companies with accrual accounting systems document forgivable expenses?
  • The headcount reduction rule is based on number of FTE employees. How do I determine if an employee qualifies as an FTE?
  • If I rehire a different employee to restore my headcount to pre-COVID-19 levels, how does this impact the wage reduction rule?
  • What is the correct period to compare the covered period against for the wage reduction rule?
  • How exactly does the wage and headcount restoration rule work?

The PPP was developed in a few-week period and amidst an unprecedented national emergency. In the 14 days after lenders began accepting PPP applications, the SBA processed nearly one and a half decades worth of loans. Given the rapid pace of the program’s creation and rollout, it is not surprising that borrowers have been uncertain about the program’s rules and had questions. The BBH team is monitoring program rules and will continue sharing pertinent updates.

Please reach out to your BBH relationship team for further information or assistance on the Paycheck Protection Program.


1 Source: https://home.treasury.gov/system/files/136/PPP--IFRN%20FINAL.pdf.

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