The Treasury Guidance issued April 23, 2020 provides important guidance on how the SBA and lenders will analyze borrowers’ forgiveness requests for their PPP loans. The Guidance states lenders will examine both the initial borrower’s eligibility for the PPP loan and how the borrower spent the funds to determine whether and to what extent the loan will be forgiven. The SBA has stated that it is funding PPP loans on a “pay then catch” basis, meaning they are funding first and then asking questions later. The Guidance reveals that a high level of scrutiny will be placed on borrowers’ statement that current economic uncertainty made this loan request necessary to support the ongoing operations. There likely will be an analysis of the liquidity the borrower had available at the time the PPP loan application was filed to determine what other options were available. The Guidance suggests that borrowers should first consider cash on hand, cash that a in parent entity holds, and undrawn lines of credit.
What this Guidance reveals about the scrutiny that will be placed on other sources of liquidity is surprising because the CARES Act specifically did away with the requirement that the borrower not have other credit available. It appears that PPP borrowers who had other credit facilities available but chose to apply for a PPP loan because the terms were better than their existing facility are going to find themselves facing hard questions when they file their forgiveness application.
PPP borrowers should begin now to prepare for their PPP forgiveness application by documenting the process they went through to determine their PPP loan application was necessary.
The SBA has offered a Safe Harbor whereby PPP borrowers who feel, on second thought, that perhaps they did have other credit or liquidity available to them, or that their need was not as great as they first suggested, can return all their PPP proceeds by May 7, 2020, and no one will ask any questions. This will make PPP borrowers even less sympathetic because the now have an opportunity to reconsider.
Contact us if you would like to discuss your PPP loan and how to prepare yourself for your PPP loan forgiveness application.