Increased PPP Loan Scrutiny - Will You Have to Give Loan Proceeds Back?

May 1, 2020

Increased PPP Loan Scrutiny - Will You Have to Give Loan Proceeds Back?

From the moment the first Paycheck Protection Program (PPP) loans were processed on April 3, 2020, both businesses and lenders have sought clarification on a number of details including permitted expenses, tax consequences and loan forgiveness guidelines.

What businesses qualify for these loans has also been a point of confusion. The Coronavirus Aid, Relief and Security (CARES) Act states that PPP loans are designated for small businesses that need relief because the “current economic uncertainty” of the Covid-19 crisis makes a loan “necessary to support their ongoing operations”.  However, when the first round of $349 billion in PPP funding was depleted in less than two weeks, it became clear that many prominent public companies had tapped into the funds, leaving thousands of small businesses out in the cold.

Following that controversy, on April 23 the Small Business Administration (SBA) updated their Frequently Asked Questions Document with FAQ 31 concerning whether businesses with adequate sources of liquidity qualify for PPP loans. This FAQ asks potential borrowers to evaluate their access to other sources of liquidity and determine whether it’s sufficient to support their ongoing operations. Sufficiently liquid businesses would then be unable to certify in good faith that they need a PPP loan to keep their business afloat. The SBA has not specifically defined “liquidity” however it is clear that the borrower must consider access to all sources of liquidity, which may include the owners of the business as well as affiliated entities.

FAQ 31 gives businesses that have already accepted PPP funds an option to return the money if they cannot demonstrate the necessity of the loan.  The deadline is May 7, 2020 to return the money without penalty.  Those that do so will be deemed by the SBA to have made the required good faith certification on their PPP loan application.

Businesses that elect to keep PPP funds will be found in violation of the False Claims Act if it is later determined that the loan was not necessary. Penalties will follow which are typically double the government’s damages plus $2,000 per false claim.

In addition to the conditions laid out in FAQ 31, Treasury Secretary Steven Mnuchin provided additional clarification on April 28 that the government will audit all companies receiving more than $2 million in PPP funding (see Herbein blog from April 30, 2020). For those businesses, it is extremely important to keep meticulous records of all qualified expenses.  These include payroll reports, copies of lease documents, utility bills, cancelled checks and payment verifications.

There are still unanswered questions regarding the audit process, but given the potential for scrutiny and penalties, now is a good time for PPP loan recipients to take a step back and determine whether the loan was a necessity. Companies should review their financial situation and consider whether their circumstances fall within the spirit and intent of this relief package.

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