There has been additional scrutiny over people that have taken the Paycheck Protection Program (PPP) loan in the last few weeks. It all boils down to one somewhat gray certification on the application.

“Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Here is what makes that unclear and left open to interpretation:

1. “Current” changes all the time. What I might forecast in March can be different in May. Factors and assumptions in a forecast change regularly.

2. What is considered necessary? One business may go bankrupt without getting cash because they were already struggling or low on money before. They certainly need the loan/grant. Another business may have cash but are experiencing lower revenue, and therefore they forecast losses. Usually, this would require lower expenses. Is this necessary? They can survive, but they may have to cut expenses 20% or 30% to do so.

3. What is ‘ongoing operations’? Does this mean operations stay the same? Do they have to go down? By how much?

The Scrutiny

The initial PPP funding of $349 billion ran out in only two weeks. Businesses with good banking relationships and Finance teams or consultants made the cut. I know all of my clients received funding in the first round.  Then the US Congress added another $310 billion, which as of May 3, 2020, has already used $175 billion. People are starting to question everyone receiving the funds.

We have seen some publicly traded companies like Shake Shack receive it and return the funds. The Treasury Department has put out additional guidance saying that public companies should not apply because they can get funding elsewhere. They are now going to audit everyone that received a loan over $2 million. They said if you return your funds by May 7, you won’t be prosecuted or fined. Yes, if this doesn’t make you second guess yourself, I am not sure what will. Are there strings attached? If the business continues to struggle and is not be able to open, then obviously funds were needed. These businesses could still be struggling after two months and may not survive. If a company kept all their employees and came up with innovative ways to keep the business running, do they need the money? What came first? The money to fund the company or the revenue to grow?

I predict we will see many businesses that took the PPP will grow and do well this year. Does that mean that they shouldn’t have taken the loan? What if they had laid off employees and just sat through the storm and barely survived? I would guess these companies will not do as well and need government money. Is this what we want businesses to do so they can later explain why they needed the money? How are they can going to audit this? Hindsight is 20/20.

The Alternative

Businesses and nonprofits have three alternatives right now.

1. Pay the money back before Thursday, May 7, and just forget about it. Tell the bank/SBA that we aren’t seeing the decline we thought, so we don’t need it now.
2. Keep the loan and not ask for forgiveness.  You can just pay it back later this year if everything ‘works out.’ How are you to know how the next six months will go after the government checks and PPP money runs out?
3. Keep the loan, and just apply for forgiveness as normal. Be sure you have all the forecasting scenarios and documentation necessary. Even consider writing a document explaining the reasoning for taking the PPP loan for your files. Maybe also sign and date this now so you can show what you were thinking at the time.

The Solution

Now each organization should consider its situation as it stands right now. I will say that there are still many unknowns.

  • We don’t know how fast the economy will pick back up.
  • We don’t know how much government stimulus checks or the PPP is helping temporarily.
  • Will the virus make a come back when states open back up?
  • Will the virus come back in the fall?

Is it possible that government scrutiny of the PPP requires most to be loans and not forgiven? That will affect businesses next year as they will have to pay it back in 18 months.

My suggestion is to keep the money and apply for forgiveness because so much is still unknown. If you felt the need to apply back in early April, then not much has changed in a month. Maybe you had a good April, but you don’t know if that was temporary. If you have a financial scenario that you would have implemented, but the PPP helped you delay this, then keep the money. If you are now making decisions about new products and opportunities in this “new economy,” then keep the money. You just need to do the following:

  1. Have a forecasting scenario that you think could happen that supports the need for the PPP. Keep this saved.
  2. Keep proper accounting books that support how you spent the money over the eight weeks. Be sure you have the support such as payroll registers and bills.
  3. Write a document explaining your need for the PPP and how you are spending the money. How are you making different decisions because you got the PPP? If there has been any negative effect you have seen, then document that also. How are you managing the crisis? What new ideas and innovations are you implementing?

Conclusion

We all know that the PPP was rushed quickly and will have many problems. I have even recently seen articles saying that they may extend the period to use the funds to 24 weeks. There will be winners and losers. I hope the government does not punish the winners and try to prop up businesses that will not last anyway. Of course, I do not support fraud, and this should never happen. Businesses should spend their funding following the law. I just know that ‘forgiven’ funds should be given even to those businesses that later realize that through hard work, innovation, and possibly good timing, they still had a good year. Don’t we all still want to have a good year?