Late last week, the Small Business Administration published new guidance on the certification rules for the paycheck protection program. The PPP loans, in other words.
The new guidance amounts to a change in the rules. And that change flags two risks for small businesses who borrowed paycheck protection program money.
So, I want to talk about all this here a bit.
Quick Review of the PPP Certification Rules
The Section 1102 “paycheck protection program” statute sets forth a number of borrower requirements.
Most of the requirements work simply. For example, you needed to be “in business” on February 15, 2020.
Unfortunately, one of the other murkier requirements has suddenly become terribly problematic.
That requirement? The self-certification requirement—or more accurately, the fluid nature of the self-certification requirement.
Quoting the actual statute, the requirement 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.
Let me quickly point out something important and then tell you how many people read the above statement.
First the quick point. The self-certification allowed a small business to get a loan. A loan you would use principally for employee payroll. Self-certification did not mean free money.
In fact, a different law, Section 1106, determines whether a firm receives loan forgiveness. Forgiveness, as you maybe know, depends on a firm using at least 75% the PPP loan proceeds for payroll, on not reducing employee headcounts, and on not reducing worker pay rates.
Here’s the second thing I want to say. Many of us thought, applying some basic common sense, that the self-certification language meant something like this:
An eligible recipient qualifies for the loan if such a loan supports the firm maintaining ongoing operations, including payroll, rent, and utilities.
To say this another way, many folks saw requesting a PPP loan as akin to applying for a backup line of credit.
And again, this important point. The self-certification requirement? It connected to you applying for and getting a loan.
Loan forgiveness? Another issue. And another statute governed that possibility.
Rule Change for Self-Certification
A few days ago, however, the Treasury and the Small Business Administration changed the rule.
Specifically, the Treasury and SBA added this question and answer to their online “frequently asked questions document.”
Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, 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 Quick Parsing of the Rule Change
In the quoted text above, I italicized and boldfaced the most relevant bits.
But in a nutshell, the new rule seems to say that you only qualify for the loan if you can’t “access other sources” of liquid funds without “significantly” damaging your “ongoing operations.”
I don’t even know what that means.
Does it mean if you can get a second mortgage on your principal residence, you don’t qualify?
Does it mean that someone on the doorstep of retirement who can tap an IRA without penalty doesn’t qualify?
Does it mean that if you can probably make it through the next two months you don’t qualify? But if you can’t make it through the next six months, you do qualify?
You might read the SBA’s “question and answer” as saying the new tighter rules apply to only to large firms like those reported by the news media. But look again at the first words I boldfaced and italicized above: “all borrowers.”
My honest assessment of the problem here? Congress did a sloppy job of writing the PPP statutes.
Now, even as they provide additional tranches of funding, they don’t agree on how the law should work, on how to fix the sloppiness. Rather, they’ve got the Treasury and the Small Business Administration creating vague new rules on the fly. Every few days.
But enough whining…
First Big Risk of Self-Certification Rule Change
I see two risks related to the rule changes.
The first risk concerns the self-certification you provided when applying for a loan.
You probably want to revisit your earlier self-certification in light of the new rules. Make sure your optics don’t look bad. Even if only in retrospect.
The change in rules contains an “out.” If you return the money before May 7, 2020, you’re off the hot seat. Which may be something you want to think about.
Just between us? If you got your loan based on self-certification that fully complied with a common sense reading of the statute? I think you’re morally fine to keep the loan. But that’s just me.
The question you need to ask? Do you want to get into an argument with bureaucrats? Or your bank?
Second Even Bigger Risk of Rule Change
And now let me mention a second risk, which is possibly even more significant.
That risk goes like this. The sloppy job that Congress (and really the Senate) did writing these statutes may mean other loan terms change as well.
At the very least, you need to stay alert to this risk. Further, the fluid rule changes may mean some firms need to recalculate the costs and benefits of the PPP loans they’ve already received.
Just to say this out loud: You may not want to use a PPP loan for payroll if the only reason you’re doing so is because you’ve got PPP loan funding. Instead, you may just want to return the money.
Terminating employees so they can receive generous unemployment benefits may be the wiser choice.
A related note—and something I’m going to talk about in my very next blog post. The way the PPP forgiveness formulas work, even a small decrease in payroll may cause you to lose all of your forgiveness.
Some Other Resources You Might Find Useful
We’ve blogged a lot about the Paycheck Protection Program and have tried to keep the articles up to date as additional guidance appears. A complete list appears here.
If you’re also rethinking your retirement plans, you might be interested in the series we did a while back on developing a “plan B” for retirement. That series starts here, Retirement Plan B: Why You Need One and then continues.
The full PPP frequently asked questions document, by the way, appears here.