Use the time to prepare.
Today on May 13, 2020, the SBA published FAQ No. 46 on how the SBA would review a borrower’s good faith certification concerning the necessity of a loan request. Any borrower, together with affiliates, who received less than $2M will be deemed to have made the certification in good faith. Borrowers over $2M may still have adequate basis for making the good faith certification based on their economic circumstances despite the language of the certification and SBA guidance.
If the SBA determines that the borrower lacked an adequate basis for certification, the SBA would not pursue administrative enforcement but would seek repayment and the borrower would not be eligible for loan forgiveness.
If your PPP loan is over $2M, it’s time to go over what you should prepare for during the verification process:
- Re-visit your original certification of need
- Document your qualitative assessment of the uncertainty and the need for the loan
- Back up your qualitative assessment with a quantitative assessment such as budget/projections, sources and uses of cash in the pre-COVID and post COVID environment that you operate
- Re-visit any other PPP loan certifications (i.e., such as affiliate guidance)
- Organize your support for the expenses used toward the loan forgiveness
- Consider a “preemptive audit”
While we still do not have the prescriptive guidance on the loan forgiveness process, in the meantime we should prepare detail records documenting the use of the PPP loan proceeds that can withstand an “audit”. Prepare yourself in manner similar to what you would do for a financial statement or a tax audit.
Because the PPP loan required certification of need, document the uncertainty of the economic conditions that existed making the loan necessary for ongoing operations. For example, were other industry participants laying off employees, cutting salaries, customers delaying payments and were there write-downs and write-offs on the horizon. Remember, while the loan forgiveness period is only measured based on the 8 weeks after the PPP loan funding, your goal is to keep people employed until the economy recovers which will be long after the PPP loan proceeds are consumed. Prepare budgets and forecasts not only during the 8 weeks but well beyond. Remember to consider ramp-up periods, reopening and returning to pre-COVID levels.
A lot has been said regarding whether separate bank accounts were required to deposit the PPP loan proceeds; there was no such requirement in The CARES Act. To track the usage of proceeds you don’t need a separate bank account, but we do recommend at least using a general ledger account to track:
- The usage of the cash and supported by payroll records
- Calculation of full-time equivalents and pay rates
- Documentation of headcount changes
- Detail invoices for all utility payments and mortgage interest.
Also, have your lease agreements in your file supporting the rent payments including the note agreements supporting the interest component. The PPP loan program was intended to ensure that businesses of a certain size had sufficient resources to keep employees on the payroll while we weathered the storm. Do not be intimidated by warnings about an upcoming audit. Instead use the time to prepare.
Please contact your BKM Sowan Horan team member with any questions.