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PPP Loan Uncertainty

May 5, 2020 Posted by Kristen Anderson in COVID-19, Crisis, Non-profits, Nonprofits

In the wake of the chaos of applying for a loan under the Paycheck Protection Program (PPP), borrowers are now uncertain if they even qualify for the PPP loan they have already received. The Small Business Association (SBA) released an updated FAQ with guidance that should make borrowers think harder about the required certification they made upon applying for the PPP loan. Additionally, comments by Treasury Secretary Mnuchin suggest that many companies who received a PPP loan do not actually meet the certification requirements – and will be audited. Although Treasury Secretary Mnuchin’s comments were mainly directed at publicly traded companies with ready access to capital, the SBA guidance regarding the required certification applies to all borrowers, including nonprofit organizations.

What does this mean if your organization has already received a PPP loan?

1. Ensure your organization met the certification requirement at the time it applied for the PPP loan.

The CARES Act requires loan applicants to certify, in good faith, that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the borrower.” In the absence of further guidance from the government, it was reasonable to interpret this literally. The threshold appeared to be relatively low, as most organizations’ operations will be reasonably uncertain as a result of the COVD-19 pandemic. Additionally, applicants did not have to prove that they did not have alternative access to credit to properly make the certification.

The SBA released additional guidance in the form of FAQ 31, essentially retroactively amending the certification criteria. Although the guidance alludes to the original certification language, it also states that applicants should take into account “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.” This statement seems to backtrack upon the original requirement that the applicant can have other sources of credit and still qualify for the PPP loan.

Unfortunately, the only example the SBA provided for a business not able to make the certification is a public company with substantial market value and access to capital markets, so it is very unclear how this will apply to nonprofits.

2. Document your organization’s analysis to support its certification.

In a joint statement issued on April 28, 2020, Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza said all borrowers that received more than $2 million will be audited, and that others may be audited as well. Therefore, it is important to document your organization’s analysis in support of its certification. Such documentation can include:

  • Meeting minutes detailing the Board of Directors’ discussion of the uncertainties your organization faces as a result of the COVID-19 pandemic,
  • Financial statements detailing your organization’s assets, liabilities, revenue, and expenses at the time it applied for the PPP loan,
  • Proof of your organization’s inability to borrow additional funds (such as a lender’s denial of a loan request), and
  • A description of the direct impact of the crisis on your organization (such as a reduction in donations or grants as compared to last year).

3. Consider returning PPP loan funds by May 14th to avoid potential penalties.

The SBA is allowing borrowers that are unsure about their certification to return their funds by May 14th to avoid any potential penalties or imprisonment. The SBA Application provides for punishment under both criminal and civil laws if an applicant knowingly makes a false statement. If your organization can do without PPP loan funds, it may consider returning the funds to avoid scrutiny.

Any certification your organization made when applying for a PPP loan need not be perfect to pass muster, however, it must be reasonable. If you are uncomfortable with your organization’s certification, please contact the Law Firm For Nonprofits for additional guidance.

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