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Tales From the Front: New Funding, Loan Forgiveness Ambiguities and…Giving the Money Back?

POSTED 04/28/2020

With round two of funding from phase 3.5, the Paycheck Protection Program and Health Care Enhancement Act ready for an SBA restart, businesses, and non-profit organizations will be divvying up a new pie with:

  • An additional $310 billion for PPP loans
  • An additional $50 billion for EIDLs
  • An additional $10 billion for EIDL emergency grants

This is an important next step for those who were unable to receive funding in round one based on the speed with which the funds were depleted. In my first PPP blog, I shared some experiences, with the hiccups I’d either seen with clients or heard anecdotally, on the initial challenges with the first round. But wait, there’s more.

How extensive is the loan forgiveness?

For those who have received funding, the sense of relief is combined with a myriad of “what’s next” questions. Indeed, the ambiguities of the funding are ample. Now there are even greater ambiguities revolving around the loan forgiveness calculation. Here are some key questions:

  • What is meant by incurred and paid and payment within the CARES Act definition for loan forgiveness?
  • Is the loan forgiveness calculated on a cash basis, accrual basis, or both? Does it differ or depend on the various approved expenses?
  • Can you really rehire by June 30th and get full forgiveness
  • What about expenses that straddle the beginning or end of your 8-week forgiveness period
  • What is rent? Does it include personal and real property? Property taxes and common area maintenance on triple net leases, late fees, etc.
  • What about deferred compensation plans
  • , etc., etc.

Can I or should I give the money back?

Interestingly, you’ve probably heard of some organizations that rushed to apply and receive the money or at least get in the queue, and then once the money arrived, had second thoughts, bad press or both. Any business person knows the best time to qualify for a loan is when you don’t need it. So, what if your business outlook actually looks better now than it did when you applied for the loan on April 3? What if is looks better two months or two years from now? Can you or should you decline it? Is it advisable? The Treasury Department just announced a plan to audit all loans over $2 million, does this change your thinking, how about the relief you felt when you got your SBA approval. Some things to consider:

  • First, if your funds exceed the amount needed to cover your payroll in the eights week after your loan is funded. You have through June 30, or possibly later if your eight weeks has not expired, to use the funds for other qualified expenses including rent, utilities, and mortgage interest.
  • Are you one of those rare employers who is actually in a position of hiring? While the loan is intended to maintain your workforce, you can use the funds to cover new hires.
  • Finally, Question 31 on the latest Q&A. What if I have alternative sources of liquidity to fund my business? Am I even eligible to apply? The CARES Act requires you to certify, “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” What role will hindsight play in this certification? Can anyone question your uncertainty? Isn’t this your feeling? They are saying with the Coronavirus; if we have fewer cases and fewer deaths, we should be reflecting that social distancing worked and was not unnecessary. Couldn’t the same “It Worked!,” be said for all the small businesses who received the PPP loan versus questioning someone’s uncertainty in hindsight. You could argue the only thing certain is uncertainty

I’ll be back with more tales from the front as the PPP and related loan programs continue. In the meantime, if any of us from Clayton & McKervey can assist you, please let me know.