Worried about your PPP certification? Stop. You should keep the PPP money.
For one thing, you probably need the money.
For another thing, the Treasury and SBA announced today a safe harbor for small businesses borrowing less than $2,000,000. (More on this in a minute.)
But let’s review, one more time, the official guidance.
And then let me suggest an “MBA” – ish way to think about the capital requirements of your firm in the time of Covid 19.
And then we’ll talk about the new safe harbor.
What the Paycheck Protection Program Laws Say
Let’s go back to the very beginning first. The actual statute—the law passed by Congress and signed by the President—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…
The first interim final rule echoed this saying,
…the applicant must certify in good faith… current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant…
And surely most borrowers applied for their loans based on the above guidance.
What Informal Online SBA Guidance Says
In the days that followed the roll-out of the PPP, the Small Business Administration provided additional guidance, including a regularly updated frequently asked questions pdf.
That “FAQ” document provides the additional guidance concerning certification, including the $2,000,000 safe harbor. The “FAQ” also creates much of the fog. And it triggers most of the worry for small businesses.
For example, answering a question about whether ”businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan,” the SBA said this:
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 few days after providing this guidance, the SBA said something similar in the “FAQ.” It declared that “businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations” should apply the same rule boldfaced above.
Small business owners pulled their hair out. Understandably.
What About Rubio and Mnuchin’s Comments?
And things got even more confusing… Repeatedly, political leaders including members of Congress, the Secretary of the Treasury and the Administrator of the Small Business Administration used news interviews and tweets (Seriously, it’s really come to that… ) to flesh out further the guidance.
A new standard seemed to emerge. At least in some people’s minds. That standard said basically “don’t take the money unless your small business’s very survival requires it.”
Complicating matters, the current decision successful PPP borrowers face? You have the option of returning the money by tomorrow (May 14) and thereby avoiding a fight with the SBA.
So what do you do? Give up? Throw in the towel? Look for some other way to get through this storm?
No you shouldn’t give up for two reasons. First, many firms probably appropriately “certified” anyway. And then, second, most small businesses get the benefit of the new safe harbor rule. But let’s talk first about the way that anyone can safely certify…
The First Question to Ask Yourself
I think you ask yourself two questions to determine whether your small business is “PPP loan worthy.”
First, have you already incurred or are you very likely to incur losses due to the Covid 19 pandemic? Those losses have eaten or will eat away at your firm’s capital. Especially its liquid capital.
If this is the case, to maintain your ongoing operations you almost certainly need to inject more capital. Period.
And that says you need something like the PPP loan to continue your ongoing operations.
A caution? Lots of people don’t understand that firms need capital to operate. Lots of people don’t realize you need cash balances to cushion the ebbs and flows of revenues and expenses. Finally, lots of people don’t understand if you burn down your cash and other liquid resources (such as due to the Covid 19 pandemic) you won’t be able to resume your normal operations until you rebuild your capital.
But you know this stuff. And you should, per the statute, be able to certify based on your ability or inability to maintain operations. Ongoing operations. My gosh, that’s actually the phrase from the statute.
The Second Question to Ask Yourself
Here’s the second question to ask yourself based on the SBA “FAQ”.
While most small businesses’ capital base and working capital have been beat up by the Covid 19 pandemic, some firms have access to other funding sources to rebuild their balance sheets. And firms in these categories, retroactively, have been denied access to PPP funds. Even though, just to say it, the statute clearly, clearly allowed them to tap the funds. And even though these firms may need additional capital.
If you’ve followed the news, you know who these folks are…
Does a business have access to liquid funds because it’s a public company (like Shake Shack)? Or is the business owned by yet another business with lots of access to capital? In these cases, sure, the firm needs to rebuild its balance sheet. That’s a simple mathematical fact.
But these firms need to find some way other than the paycheck protection program.
The $2,000,000 Safe Harbor for Certification
This morning, conveniently, the SBA published new guidance on the question of forgiveness. That guidance, which appears as “FAQ” Question #46, provides this key safe harbor:
Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
In other words, if your loan balance falls below $2,000,000, the SBA and Treasury figure (correctly) two things. Almost surely you need to rebuild your balance sheet. And for all practical purposes you lack access to other funding sources.
For small firms who borrowed or wanted to borrow more than $2,000,000, the common-sense approach described above should still apply. And the new guidance essentially says that, declaring:
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.
Bottom-line, though, if you’re small enough? The SBA assumes you made a good faith certification. Which is fair and makes sense.
Some Other Resources You Might Find Useful
The working capital required for a small business is a good topic to ponder even outside of the Covid 19 pandemic. This blog post we did a while back might be useful fodder for such thinking: Small Business Rainy Day Funds.
And then one other thought… It’s not too soon to think about how you position your firm to grow after things settle down, and this blog post might be relevant: How to Grow a Small Business.
Could you please address how the safe harbor applies to self employed and 1099 workers that received a PPP loan for 2
5 times wages. Thank you.
Well, these folks don’t need to worry about the certifications related to needing funding for economic uncertainty. (They’re surely way under $2M.)
In effect, these people get to use PPP money as a sort of unemployment insurance for business owners… which is good because it’ll let them continue to work in their businesses even if they’re not making money. Yet.
Great news, thanks for clarifying this!
Does this mean that if I have a business line of credit, let’s say 100,000. I am not suppose to have a pop loan? To help me rebuild our smaa company.
I would assume that your PPP loan is or would be under $2M and so you can use the safe harbor… in that case, you don’t need to worry about SBA “coming after you” on basis that your certification wasn’t “good faith”…
The question is, do you need the money to maintain ongoing operations. I would not be surprised if you do.
So an essential company, that has neither lawoffs or furloughed people, with plenty of work, and actually looking for help, get the ppp loan and also have it forgiven? Our company did and I think it’s wrong!
Maybe in the case you describe it is wrong. The question would be, does the Covid 19 pandemic create enough economic stress that the business’s ongoing operations are threatened or degraded.
To give you a handful of examples of how everything you say might be true but at the same time the firm may be struggling economically…
First, are customers paying later? I.e., you’re doing the work and billing customers. But they’re delaying paying because their business is deflating.
Second, are people working as hard as ever but with reduced efficiency due to “work at home” arrangements or social distancing practices in the workplace.
Third, are things okay now but management knows that in two weeks or a month, the situation gets dicey. Maybe a big customer has let management know they need to stop buying. Or maybe the bank doesn’t feel comfortable renewing a credit line.
Bingo! Often people not involved in managementhave big mouths, with little understanding of the long view
That’s what government thinks about Business that pay there Contracts 1099 they get PPI loan a I don’t they turned me down have 4 drivers that I 1099 for $69000 a year each. They don’t have a federal EFN number or a business? Fug bull shit?
I am one of the partners in general partnership. I am an artist and of course all of my shows have been cancelled, and will be for some time to come. I applied for the EIDL because I didnt think I qualified for a PPP loan since I do not have payroll per se…BUT I do need an income, and it was very u clear if I could take a salary out using PPP. The day after I applied for the EIDL, up to 10k per business, the rule changed, and it allowed for only 1,too. Per employee…I received a deposit of 1,000. In my checking account. Not 2,000, which would have been 1k for each partner. As far as I know, I cannot apply for a PPP loan anymore, nor can I ask for more EIDL…our state is still jot ready to accept self emoyes claims for unemployment…I am a VERY small business. What should I do?
The partnership can apply for a PPP loan based on partner income. You may want to look at this again.
As an independent..i pay.myself under my own LLC..how do i know about the forgiveness of the loan and shojld i communicate with the bank that lent me the money
The way I read the guidance available as of yesterday, you’ll get forgiveness for 8/52nd of what your Schedule C from 2019 shows.
Example: That Schedule C showed $52,000 in profits. So 8/52nd of that equals $8,000. That’s what you’ll get forgiveness for…
Some people think you can get that forgiveness, basically, automatically. Simply by showing your Schedule C from 2019. I worry that you may need to actually pay out as “owner draws” the amount. So, in my example, $8,000. Or maybe more ideally, $1,000 a week for the eight weeks the forgiveness looks at.
Thanks so much Steve for sharing this! I established my startup in the first week of Feb, 2020, so it was operating on Feb 15, 2020. However, there’s no payroll yet. I’m not on payroll; the startup has no funding. I gave an offer to my first hire in March, but later rescinded the offer due to Covid situation. I will now rehire the person this month. Is the startup eligible to apply for PPP? If so, could their salary be forgiven? Thanks!
I think you won’t get enough payroll to make this work. Sorry.
Here is our plan:
S-corp with 2 owners on payroll.
Allow all employees (including owners) that are currently collecting unemployment to continue receiving unemployment payments until we have to pay them to max out forgiveness. Received ppp deposit $10,100.00 on 5/7/2020. This makes our 8 week date 7/2/2020. So on 6/15/2020 stop unemployment and pay the employee her regular pay and pay both owners $1923.08 a week for 3 weeks. Short the last week by a little to just get to the forgiveness number of $10,100.00.
I see nothing in the law or interim final regulations that lead me to believe we can’t increase pay to the maximum allowed for forgiveness, and nothing saying we must start taking pay as soon as the money is deposited.
The strategy here is to collect unemployment for an additional 5 weeks before restarting payroll. I would suggest everyone who had to lay off employees look into this if it is a viable strategy. Thoughts?
Additional note: Our PPP money for both our businesses was not as much as asked for or should have been. The bank “refigured” the amount incorrectly. When brought to their attention the only option was re-apply and get back in line with the SBA and risk round 2 running out or take it as is and shut up about it.
Hi Brian,
Check out the blog post I did this morning on the loan forgiveness application (which appeared last night):
https://evergreensmallbusiness.com/paycheck-protection-program-loan-forgiveness-application-tips-tricks-and-traps/
I think the loan application program answers your questions?
Hi Steve,
I am a single shareholder in a S Corp and pay myself a salary and take distributions. I formed a retirement plan after February 15th, 2020 to which I and the S Corp contribute. I received a PPP approval this week that does not include the retirement contributions as part of the calculation. Could I apply the retirement contributions for the plan formed after Feb 15th for the forgiveness application or is their a requirement that the plan should be in place at Feb 15th?
Thanks,
Gerry
I think that maybe works. Don’t see why you can’t try. See the blog post I published this morning on what the loan forgiveness application tells us:
https://evergreensmallbusiness.com/paycheck-protection-program-loan-forgiveness-application-tips-tricks-and-traps/
New sba.gov guidelines line 11 says forgiveness amount
Can this be looked as partial forgiveness if don’t reach 75% Payroll
See the blog post I did this morning, I think it probably answers your questions. Paycheck protection program loan forgiveness application.
As a sole proprietor, I applied for unemployment and PUA in my home state of Virginia. I have also obtained the PPP. Does this mean I won’t be able to get UI and PUA because I have the PPP?
I don’t know. Sorry. I think it depends on your state’s laws and rules.
I’m a Sub S company. I run a personal training business with 1099 trainers. Their commissions help pay the operating costs and grow the business. When the PPP first started I could file for my 1099 trainers so they didn’t file. The bank gave me the PPP amount which included my 1099 trainers and my W2 payroll amount. I don’t know what to do. My trainers need the money but the rules changed. I’m afraid to pay them and I won’t be forgiven. This sucks!
So, the bank bungled your PPP loan. You shouldn’t have gotten PPP money to pay 1099 contractors. Rather, they should have applied for their own PPP loans.
You should contact the bank and ask how they want to help correct the error. Let me think about this–and maybe someone else will share an idea–but would it work to hire the 1099 contractors? Make them W-2 employees so you can get forgiveness?
Hi Steve,
Do you think that a restaurant liability insurance can be considered an UTILITY for the PPP forgiveness?
Thank you!
I don’t think so. Sorry. Rent, interest and utilities…that’s it.(Well, except for payroll.)
I’m an accountant and have a client who has received the PPP loan. They are an S-Corporation that has suffered significant loss, however, I believe they have listed their company as a Sole Proprietorship using total net income instead of the S-Corporation W2 wages for the 2.5 x monthly payroll amount and have received a PPP loan amount of 10 times the amount they should have received. For reference, the amount they received was around $12k instead of $1.2k. Giving them the benefit of the doubt and assuming this is negligence, what should they do at this point?
Additionally, what steps would you take if you were in my shoes and they refused to take necessary actions? Would you report them to the SBA’s Office of Inspector General? Would you terminate future services with them?
***I understand that you are not an attorney and am not asking for official legal or tax advice. I am more so looking for an unofficial opinion.
Oh gosh, what a messy predicament… Yikes. I guess what I’d think about doing is assume this is an honest mistake stemming for the complexity of the program. Probably they should try to return the money? The $1.2K they should have received isn’t so much that it’ll save their business. Not worth fines, accountant costs, or general hassle.