Millions of small business owners, from independent contractors to the CEOs of small companies, have applied for Paycheck Protection Program loans over the last few weeks. Now, some of those business owners are considering returning their PPP loans, or hoping that their decision to take one of these loans does not constitute fraud.
The vast majority of business owners who will receive a PPP loan can make the argument that they needed it: Unemployment is at historic levels, demand is way down, and restrictions continue to limit how businesses can operate in light of the coronavirus pandemic. But uncertainty around PPP use and forgiveness means that many are unsure whether they truly qualified for one of these low-interest, forgivable loans.
The Treasury was supposed to issue official guidelines around PPP loan forgiveness 10 days after the passage of the CARES Act, the law that created the PPP. The department has instead rolled out this guidance slowly, over the course of many weeks. On May 15, the government released SBA Form 3508, which is the official loan forgiveness application, but questions about loan usage remain.
This guidance gap, in conjunction with announcements from the federal government that the Treasury would audit and hold liable businesses that took out unnecessary PPP loans, has caused anxiety and confusion over a program that was supposed to be straightforward and easy for small business owners.
Due to that lack of official guidelines, we can’t say for certain at this point what uses of the PPP beyond what was expressly noted as forgivable in the CARES Act might trigger an audit. We do have some best practices for protecting yourself and your business before and after receiving your PPP loan.
Review and Confirm the ‘Good Faith’ Certification
One of the requirements of applying for and receiving a PPP loan is making a “good faith” certification that they need this loan due to current economic conditions.
What does it mean to certify something in good faith? It means that the government is asking you to honestly assess your business and not take the loan if you don’t need it. Like much of the guidance around PPP loans, it’s a bit vague and open to interpretation.
The Treasury doubled down on this guidance in its official Q&A document:
“Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary…
For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”
According to the Treasury in its most recent update of its Q&A, businesses with loans for less than $2 million “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” The assumption here is that businesses with these loans amounts likely don’t have access to other forms of liquidity. So if you have a loan amount smaller than $2 million, you will likely be spared an audit.
On the other hand, businesses that take out loans in excess of $2 million may be subject to an audit by the SBA, and if the government finds that the borrower doesn’t have a good case for having a PPP loan, they’ll be required to repay it.
Regardless, if you’ve already taken out a PPP loan, review this language again and make sure you feel comfortable saying—and, as we’ll discuss below, proving—that you needed a PPP loan. If you have yet to apply but plan to, take this language seriously and hedge on the side of caution.
Document Your Pre-Application Finances
Part of the good faith certification language says that the borrower must feel that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Again, this language is rather vague. How do you define words like “uncertainty” and “necessary” in the context of your small business, which supports you, your employees, everyone’s families?
There is no official definition, but what will help make your case that the loan was necessary and that your situation was uncertain is documenting how your finances and outlook changed as the pandemic reached the U.S.
Of course, your business bank statements and/or payroll documents should testify to your diminished revenue, or need to lay off workers. Other helpful documents may be proof of cancelled orders or events, communications with vendors or clients showing drops in business or availability of materials, and updated financial projections.
Be prepared to share this documentation with a lender, the SBA, or any other relevant party.
Open a Separate Bank Account for Loan Proceeds
There are many questions surrounding how to use a PPP loan to maximize loan forgiveness, or even to ensure partial forgiveness. One easy tactic you can use is opening a separate business bank account specifically for your PPP loan proceeds, and only making forgivable expenses (payroll, rent, utilities, mortgage interest) or other “eligible” expenses which are allowed though not forgiven (such as existing debt payments) with that account.
This will make tracking your loan usage much easier. In addition, because (according to current guidelines) you cannot deduct expenses made with your PPP loan on your business taxes, you won’t have to parse through a single bank account to differentiate what expenses are deductible and what are not.
If you can, open a free business bank account, so you aren’t spending money needlessly to accomplish this goal.
Keep in Touch With Your Lender Regarding Rule Changes
The Treasury is updating its Q&A document all the time, and more official PPP loan forgiveness guidance is said to be forthcoming. That means that clarification or even outright rule changes—for how you can use your PPP loan, or what percentage of your loan will be forgiven—are possibly on the horizon.
Some rule changes are more likely than others. For example, there is a lot of traction in Congress for altering the rule that only a maximum of 25% of the PPP loan can be used on rent, utilities, and mortgage interest. There is less interest, on the other hand, for changing the rule that the “covered period” for the loan will only last eight weeks.
A good rule of thumb here is to keep in touch with your lender and see if they can provide you additional guidance or a clearer understanding of how rule changes might affect your ability to use your loan without incurring criminal charges or sacrificing full loan forgiveness. Lenders will want to minimize the amount of paperwork and back-and-forth between themselves, the SBA, and the borrower come forgiveness time, so expect them to be proactive in sharing this information if it affects you and your loan.
Don’t ‘Double-Dip’ With Other Loans and Tax Credits
One area where the government appears to be particularly concerned about either fraud or general misappropriation is the concept of “double-dipping.” They don’t want business owners taking out more than one PPP loan from multiple lenders, or using both a PPP loan and the employee retention credit to reduce their payroll costs during the pandemic.
At the beginning of the PPP application process, businesses were discouraged from applying with more than one lender for the loan. Over time, as some lenders were capped at disbursing a certain amount of loan capital and technological backlogs piled up, that guidance changed and lenders encouraged business owners to seek loans from multiple sources. But you cannot accept more than one PPP loan. If you sign the contract for a loan from one lender, you should not move forward in the application process with another at that point.
Similarly, if you decided that the employee retention credit, a payroll tax credit, was a better and more immediate source of relief for your business, you are ineligible for a PPP loan on top of that at the moment. And although you can accept both a PPP loan and an economic injury disaster loan (EIDL), you cannot use your EIDL to cover payroll costs in that instance, since that is the primary use case for a PPP loan.
Return the Loan, If Necessary
If you’ve decided for whatever reason that the PPP loan is not necessary for your business—perhaps you’ve had a change in fortune, or don’t feel comfortable abiding by the existing guidelines—the government has given businesses the opportunity to return their loan proceeds.
The “safe harbor” period for returning your loan has been extended to May 18. If you send your loan proceeds back to your lender by that date, you shouldn’t need to worry about a call from the federal government regarding your decision to apply in the first place.
This is a complex situation, compounded by the fact that many of us are under incredible stress due to the fallout from the pandemic. If you are unsure about how best to use your PPP loan, you aren’t alone. Follow the tips above, review the guidance that is available, and make the best decisions for your business. Incoming guidance from the federal government should make things clearer in the days ahead.
Note: Fundera is not providing and does not intend to provide legal advice or otherwise to act in a fiduciary capacity. Fundera is only providing general information for illustrative purposes. Fundera is not providing and does not intend to provide information specific to any individual company. Information provided by Fundera, therefore, should not be relied upon by any individual company. Each individual company should evaluate its own unique circumstances independently.