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PPP Certification and the New Safe Harbor

Worried about your PPP certification? You should almost certainly keep the PPP money. And also stop worrying about your certification. For one thing, you probably do need the money.

And then for another thing, the Treasury and SBA announced today a safe harbor for small businesses borrowing less than $2,000,000. (More on this in a minute.)

But let review, one more time, the official guidance from which all the fear mongering and chatter flows.

And then let me suggest an “MBA” – ish way to think about the capital requirements of your firm in the time of Covid 19.

And then we’ll talk about the new safe harbor.

What the Paycheck Protection Program Laws Say

Let’s go back to the very beginning first. The actual statute—the law passed by Congress and signed by the president—says this:

An eligible recipient applying for a covered loan shall make a good faith certification that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient…

The first interim final rule echoed this saying,

…the applicant must certify in good faith… current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant…

And surely most borrowers applied for their loans based on the above guidance.

What Informal Online SBA Guidance Says

In the days that followed the roll-out of the paycheck protection program, the SBA and Treasury published a variety of additional guidance documents. A key component of which is their regularly updated frequently asked questions pdf.

That document provides additional discussion of the certification requirement, including the $2,000,000 safe harbor

For example, answering a question about whether ”businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan,” the SBA said this:

All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.  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.  Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  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 not significantly detrimental to the business.  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.

A few days after providing this guidance, the Treasury and SBA said something similar, declaring that “businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify” apply the same rule boldfaced in the paragraph above.

Small business owners pulled their hair out. Understandably.

What About Rubio and Mnuchin’s Comments?

And things got even more confusing… Repeatedly, political leaders including members of Congress, the Secretary of the Treasury and the Administrator of the Small Business Administration used news interviews and tweets (Seriously, it’s really come to that… ) to flesh out further the guidance.

A new standard seemed to emerge. At least in some people’s minds. That standard said basically “don’t take or keep the money unless your small business’s very survival requires it and you can prove it.”

Complicating matters, the current decision successful PPP borrowers face? You have the option of returning the money by tomorrow (May 14) and thereby avoiding a fight with the SBA.

So what do you do? Give up? Throw in the towel? Look for some other way to get through this storm?

No you shouldn’t give up for two reasons. First, many firms probably appropriately “certified” anyway. And then, second, most small businesses get the benefit of the new safe harbor rule. But let’s talk about the way that anyone can safely certify first…

The First Question to Ask Yourself

I think you ask yourself two questions to determine whether your small business is “PPP loan worthy.”

First, have you already incurred losses or are you very likely to incur losses due to the Covid 19 pandemic? Those losses have eaten or will eat away at your firm’s capital. Especially its liquid capital.

If this is the case, to maintain your ongoing operations you almost certainly need to inject more capital. Period.

And that says you need something like the PPP loan to continue your ongoing operations.

A caution? Lots of people don’t understand that firms need capital to operate. Lots of people don’t realize you need cash balances to cushion the ebbs and flows of revenues and expenses. Finally, lots of people don’t understand if you burn down your cash and other liquid resources (such as due to the Covid 19 pandemic) you won’t be able to resume your normal operations until you rebuild your capital.

But you know this stuff. And you should, per the statute, be able to certify based on your ability or inability to maintain operations. Ongoing operations. My gosh, that’s actually a phrase from the statute.

The Second Question to Ask Yourself

Here’s the second question to ask yourself (and this is based on the careful, parsed reading of the quoted language above as well as the certification safe harbor I”ll talk about in a minute).

While most small businesses’ capital base and working capital have been beat up by the Covid 19 pandemic, some firms have access to other funding sources to rebuild their balance sheets. And firms in these categories, retroactively, have been denied access to PPP funds. Even though, just to say it, the statute clearly, clearly allowed them to tap the funds. And even though these firms may need additional capital.

If you’ve followed the news, you have a pretty good handle on who these folks are…

Do you have access to liquid funds either because you’re a public company (like Shake Shack) or because the small business we’re talking about is owned by yet another business with lots of access to capital. Then, sure, you too need to rebuild or maintain your balance sheet to maintain ongoing operations. That’s a simple mathematical fact.

But your firm? Yeah, sorry, you need to find some way other than the paycheck protection program. You maybe need to tap the capital markets. Or look to the business that owns your business.

The $2,000,000 Safe Harbor for Certification

This morning, conveniently, the SBA published new guidance on the question of forgiveness. That guidance, which appears as Question #46, provides this key safe harbor:

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.

In other words, if your loan balance falls below $2,000,000, the SBA and Treasury figure (correctly) two things. Almost surely you need to rebuild your balance sheet. And for all practical purposes you lack access to other funding sources.

For small firms who borrowed or wanted to borrow more than $2,000,000, the common-sense approach described above should still apply. And the new guidance essentially says that, declaring:

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.

Bottom-line, though, if you’re small enough? The SBA assumes you made a good faith certification. Which is fair and makes sense.

Some Other Resources You Might Find Useful

The working capital required for a small business is a good topic to ponder even outside of the Covid 19 pandemic. This blog post we did a while back might be useful fodder for such thinking: Small Business Rainy Day Funds.

And then one other thought… It’s not too soon to think about how you position your firm to grow after things settle down, and this blog post might be relevant: How to Grow a Small Business.

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