MIAMI – Business attorney Christian Rodriguez said new language regarding the government’s Paycheck Protection Program is confusing some small business owners.
Here are his answers to some questions he has been fielding from clients:
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Q: The new PPP application process started on Monday: what are you hearing from your small business clients?
“The process seems more streamlined this time around, but it's too early to know. I think you're going to see lenders a lot more cautious about lending to larger companies during this second round.”
Q: What is it about the language that has spooked some of your small business clients?
The SBA recently released new frequently answered questions.
The response to FAQ #31 has prompted several reactions that have worried applicants and recipients of the PPP loans.
Response #1: Anxiety caused by the language itself.
“The SBA’s written response to FAQ #31 contains vague language which seems to indicate that if borrowers can gain access to liquidity elsewhere, they should not be accepting the loan. Specifically, it states, ‘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.’
So, what’s the problem with the way this is written?
"First, the question itself indicates that the answer is geared towards large businesses, ’31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?'
Second, the CARES Act did away with the requirement to show that you cannot obtain funding elsewhere which indicates that the policy overall is to help small businesses that don’t have access to funds elsewhere; however, businesses need to 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.’ Unfortunately, the SBA hasn’t provided any clear guidance on what qualifies as being able to ‘support ongoing operations in a manner that is not significantly detrimental to the business.’ So when doing your certification, you have to put together documentation that supports the argument that failing to obtain the PPP loan would be significantly detrimental to your business. For example, if you have reserves, you need to analyze how far your reserves would take you to pay PPP approved expenses, and whether failing to get the loan will cause you to have to take drastic actions (such as furloughs or layoffs) in the next 1-3 months. It would also be prudent to document all efforts made to cut expenses and costs that are discretionary."
Response #2: Anxiety caused by the response several banks have had to the language.
The SBA’s written response to FAQ #31 has prompted banks to send out emails to all clients (regardless of size) trying to notify them of the SBA’s guidance. While the e-mail seems well-intended, its execution has caused anxiety to many small business owners. In relevant parts, these emails state something to the effect that:
“Regulatory guidance issued on April 23, 2020: Makes clear that PPP loan applicants 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. All borrowers should review carefully their required certification that ‘current economic conditions make this loan request necessary to support the ongoing operations of the applicant ... Knowingly providing false statements to obtain a guaranteed loan from the SBA is punishable under the law, including material fines as well as possible criminal charges and imprisonment ... We are working hard to process applications quickly, efficiently and in accordance with all governing regulatory requirements. We also want to keep you informed as guidance is provided, so that you can make decisions that are in the best interest of your business. However, each business represents unique circumstances, and, as such, we are unable to provide you specific guidance on your eligibility in the PPP. Please consult your legal counsel for guidance.'”
"Clearly, while we doubt it is the intent of the bank to scare its borrowers, it’s an unintended consequence of sending this type of email. Most small business owners that have received this type of email have understood it to me that you made a certification and if it’s not true, you could face criminal consequences and you need to speak with your attorney.”
Q: What do you think small business owners should know?
"First, you have to keep in mind the purpose of the PPP program. If you are a small business with less than 500 employees and with a necessity for the funds (which is the vast majority of small businesses), then you are the type of borrower that was intended to take advantage of this loan program.
"Second, the SBA previously indicated that lenders are not required to independently verify the information provided on the application documents and can rely on the certifications of the borrowers. Therefore, it is important that all applicants be truthful with their certifications and need to make sure the certifications are accurate; however, this has been the case since the inception of the PPP and has nothing to do with the new guidance.
“Third, SBA’s FAQ #31 is primarily directed to large public companies with substantial market value and access to capital markets. The vast majority of small businesses will not meet this criteria.”