If you’ve been following the Paycheck Protection Program (“PPP”) news, you’ve probably heard about some large companies like Shake Shack and Ruth’s Chris Steak House getting approved for PPP loans, while many smaller organizations struggled to even find a lender that would process their applications. While the letter of the CARES Act law seemed to provide some leeway allowing those large companies to receive PPP loans, the backlash was swift. Many of those companies have returned the money they received or pledged to do so.
Those companies (and many others, I’m sure) were likely relying on some broad language in the original text of the CARES Act when they certified that they needed the money. To refresh your memory, in order to receive a PPP loan, you had to not only provide a bunch of documentation, but also certify your need. The text of the certification reads:
“…the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient”.
Vague and broad, right? Perhaps purposefully so. However, with the initial funding running dry in less than two weeks and the negative press about those large organizations receiving funding instead of the neighborhood business, it became clear that if mom and pop were going to be able to get their share of the PPP pie in the second round of funding, then things were going to have to be tightened up a bit. So, on April 24th the SBA fired a warning shot. In yet another Interim Final Rule, coupled with an update to their FAQ document released the day before, the SBA, among other things, gave PPP borrowers a way out, essentially saying that if you had perhaps been a little aggressive with your interpretation of that certification and the spirit of the CARES Act, just send the money back by May 7th and we’ll forget it ever happened. The SBA further emphasized the point in their FAQ:
“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 [emphasis mine]. 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.”
That FAQ was further broadened with an update on April 28th to specifically include private companies, not just public companies.
It’s understandable that many rushed to apply for the funding given the uncertainty of the situation, but now the SBA has given everyone a chance to step back and ask, does my organization really need it? As you ponder that question, consider several things:
- Were you planning to retain your existing staff and compensation levels through the pandemic even if you didn’t receive PPP funds?
- Did you or do you believe your organization’s reserves were sufficient to get through the pandemic without accessing PPP funds?
- Are there things that your business can cut back on (or are forced to cut back on) other than payroll costs that could help you maintain employment?
If you answer “yes” to any of these questions, you may want to rethink whether to apply, or, if you’ve already been approved, to return the money. Remember, as a nonprofit your finances are going to be public information, and you can bet someone will be looking.