Kranz receives frequent updates on the CARES Act and how businesses are responding to impacts of the COVID-19 through communications with our consultants, valued clients, partner banks, and legal and tax service providers. In our commitment to keeping you informed, we will be sharing this information on a regular basis.
PPP Loan Update
Loans Approved and Funding Update
Through April 11th, over 3,200 SBA qualified lenders had approved 725,000 PPP loans totaling $182B against an amount of $349B (frequently referred to as $350B) approved through the CARES Act. Disagreement occurred in the Senate last week on a request to increase PPP loan funding by $251B. There will be a second attempt to approve the increase and sent it to the House for full approval this week.
PPP Loan Recommendations
PPP loan requests need to be submitted prior to June 30, 2020, but we recommend doing so as early as possible. We also highly recommend a discussion with your board of directors and legal counsel around the objectives and benefits of applying for a PPP loan.
In that regard, having a good corporate process around your decision-making process is key:
- Counsel or corporate secretary should be documenting the entire process with minutes
- Develop documentation of the necessity for the loan as well as what makes you eligible
- Develop basic financial information for supporting your eligibility
- Begin implementing structure and process around your record-keeping to be used for requesting loan forgiveness.
PE/VC Backed Firms Eligibility
A key outstanding issue pertaining to the applicability of affiliation rules to PE/VC backed firms as it pertains to their eligibility for PPP loans has yet to be resolved. This article from April 10 provides good information on this topic. Clarification of Affiliation Issues.
A reminder regarding loan forgiveness. The CARES Act’s intent is that PPP loan funds are to be used for the purposes of retaining employees and covering a portion of non-labor costs for a 60 day period at which point the expectation is that the coronavirus issue will largely be behind us and businesses will be open. Loan forgiveness needs to be applied for and can be done through mid-December 2020. Only the loan funds spent over 60 days starting at the point when the loan was funded are eligible for inclusion in the loan forgiveness request. This means that recipients of PPP loans will maximize their loan forgiveness opportunity if all loan funds are spent during those 60 days.
A further stipulation is that no more than 25% of the funds spent during that period can be for utilities, lease expense obligations incurred before February 15, 2020, and mortgage interest expense obligations incurred before February 15, 2020. To the extent that more than 25% of the loan funds are used to cover non-payroll costs, the amount of the loan forgiven will be reduced.
Finally, in loan forgiveness amount calculation instructions to be released by the Treasury in the coming weeks, we expect to see details of how loan funds spent for payroll-related costs will be compared to the payroll costs used to determine the PPP loan amount. Expect to see reductions to the approved loan forgiveness amount if there are significant reductions between the two, or reductions in the number of individuals employed when the loan was applied for and now.
CARES Act Additional Cost Savings
Aside from the PPP loan option the CARES Act provides additional cost-saving opportunities for small businesses. One in particular Deferral of Employment Taxes is explained in this IRS document.
Recently Received Questions
What if our application has been submitted before having a board discussion?
If the COVID impact is not obvious (e.g. Company has 12-18 months of runway) your board should have that conversation now (it is not too late). From a process perspective, it will take at least 10 days from application approval to funding.
If funds already hit the account and certification is inaccurate (i.e. company was actually ineligible), what should we do?
Unwind the transaction and return the funds immediately. If it’s not as clear of a situation, encourage your board to discuss whether or not to return the funding. An immediate correction would not warrant SBA enforcement.
SBA/Congress has not defined what is considered a corporate “necessity” to take the PPP loan as it does for an EIDL loan. Can you clarify?
An EIDL (Economic Injury Disaster Loan) process and eligibility requirements are stricter than they are for a PPP loan. As an example, your company will need to shut down without the loan. SBA has not included this qualification requirement for PPP loans that are intended to prevent you from having to reduce the number of your employees. If you can clearly document how your business has been meaningfully impacted, your case should be compelling to substantiate the need for a PPP loan.
What are the penalties for misrepresenting the application?
There is a very big difference between getting it wrong versus intentional misrepresentation. Getting it wrong – If you documented and can prove that you arrived at the decision in good faith, the likely penalty would be loss of forgiveness/repayment of the loan. Intent to misrepresent or reckless disregard for rules (e.g. affiliation rules) – If you did not go through a deliberate process for determining your eligibility and applying for the loan, if you say things in your board deck such as “we don’t need money but it would be nice to have” civil and criminal penalties may apply.
Is it difficult to modify documents (e.g. removing negative covenants) and are there legal and reputational risks for doing so?
It doesn’t appear that it will be difficult to modify documents concerning negative covenants. There could be negative press but legally you are in the clear. A temporary waiver is likely legally clear but would be bad optics and not recommended.
How does a fundraising timeline factor into a demonstration of necessity?
If your company is currently going through a fundraising round but will be out of cash in 60-90 days, you should be okay. A pre-determined cash need is a very clear demonstration of necessity. However, your request for a loan would be hard to justify if your company just received funding or will receive funding right after receiving the loan
Would you recommend segregating the funds from the loan?
It will make it much easier to track the use of proceeds for forgiveness.
Recommended websites for additional information and guidance:
For You – The Treasury department will be launching a web-based application at www.IRS.gov this week enabling individuals to expedite receipt of individual stimulus payments. While all payment recipients can expedite receipt of their payments through this site, it is in particular designed to enable those who have not filed tax returns in prior years to enter information enabling a direct deposit of their payment to their bank account. Check Get My Payment for more information.
National Venture Capital Association (nvca.org)
U.S. Department of the Treasury (www.treasury.gov)