Should you keep your PPP Loan?

May 11, 2020 - 4 minutes read

I’m sure you’ve heard about Shake Shack and Ruth’s Chris walk of shame. They gave their PPP money back after the media and the government made their situation public. Just in case you’re wondering how it works, here are a few communications from the government that illustrate what they are thinking.

Cares Act certification made during your loan application

“The uncertainty of the current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”

And Marco Rubio tweeted on April 2, 2020

“The certification language in #PPP is real & enforceable. That is why any company (of any size) that hasn’t been harmed by the current economic conditions & nevertheless applies for & receives #PPP has a big problem.  They made a false certification to the federal government.”

The Small Business Administration FAQ update Q&A 31

“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.”

The Small Business Administration FAQ update Q&A 39

“SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.”

Going forward, it looks like banks, Treasury and the SBA will apply new rules retroactively and they will justify them citing the word “necessary” . The question is what does necessary mean and how do you justify it weeks after the money was spent?

So, let’s follow the bouncing ball. Banks are responsible for accepting the applications and distributing the funds with oversight by the SBA. The SBA’s boss is the U.S. Treasury. Now, the IRS has your tax information and they are overseen by the U.S. Treasury. They haven’t mentioned it yet but, it’s not a huge step for Treasury to compare the loan applications against your tax return to do the initial assessment of whether the loan might, just might, not have been necessary.

So, while you wait for further guidance, you should carefully consider “why” the funding was a necessity when you applied and when you signed the loan documents. It’s probably a good idea to document that “why” in your corporate minutes. If you decide the funds weren’t necessary you have until May 14th to return the funds, no harm, no foul.

It reminds me of playing cards with my uncle when I was a kid. He’d make up the rules as we played.