Once you hear from your bank that you will receive a Paycheck Protection Program (“PPP”) loan, you should ask some key questions and consider the recommendations below:
- If applicable, confirm you are not violating existing debt documents by accepting the PPP loan. The PPP loan is unsecured and does not require a guaranty; however, you should confirm that existing debt documents do not contain a general prohibition on taking on new indebtedness without the consent of your existing lender. If you are getting a PPP loan through your existing lender, their processing the new loan may amount to consent on its own, but you should confirm with your banker. If you are uncertain what your existing loan documents permit, you should confirm with your lawyer.
- Review your organizational documents for what corporate authority is needed to borrow money. Review your businesses existing organizational documents for what consents are required to borrow money. This may necessitate board approval or in some instances shareholder/member approval. Work with your attorney to pull together the requisite approvals in advance of borrowing.
- Ask the bank when you will get the money. There has been speculation that the money could come as soon as the day after approval or weeks after approval. Your bank should know.
- If applicable, ask the bank if you can delay getting the money. All guidance to date suggests that the 8-week forgiveness period starts when you get the money. First, confirm that is true with your bank. Second, if it will take you time to rehire your employees, whether because of logistics or because you are in a state like New York and your business has been classified as non-essential (and your business does not lend itself to working remotely), ask your bank if you can defer receipt of the money without jeopardizing your rights. If you are able to defer receipt, do not lose sight of the June 30, 2020 deadline, which has not changed. It is possible that several companies may be prevented (because of government orders) from reopening before May 5, which is 8-weeks from June 30. We do not know if the government will extend the June 30 deadline or the 8-weeks to account for such an issue.
- If you haven’t already done so, set up a new bank account to hold the funds at the time the loan is made. We suggest that you do not commingle the loan funds with other funds you have or will receive from other sources, including any loan proceeds from the EIDL. We believe this is the best approach to avoid any confusion or question as to what money you spent during the 8-week period. For example, if you put the PPP loan into your general account which is where customer receipts, other loan proceeds, etc. are deposited, you would not want there to be any confusion as to which of those dollars you spent on forgivable payments.
- Work with your internal/external accountants to set up a proper system for using, tracking, and reporting all payments made from the PPP loan. This is a critical step to making sure you maximize forgiveness. At its most basic level, this includes training your staff about the payments that should be made from the account holding the PPP loan, redirecting auto withdrawals for applicable payments to the right account, etc. This does not mean that you need to upend your entire process but that you need to be thoughtful to avoid any argument that you didn’t use the loan proceeds to pay the applicable payments.
- Plan what you are spending the money on. The Treasury’s interim final rule from April 2, 2020, states that “at least 75 percent of the PPP loan proceeds shall be used for payroll costs.” For purposes of determining the percentage of used proceeds for payroll costs, the amount of any EIDL refinanced will be included. If loan funds are misused, the SBA will direct you to repay those amounts, or if you knowingly misuse the fund, you may be subject to additional liability such as charges for fraud.
- Continue to talk to your banker, lawyer, and accountant to see if there have been any changes or clarifications to the program that impact you. Make sure you are continuing to monitor the updates and additional interim guidance being issued by the SBA and Treasury as it relates to the PPP loan program. Elements of the program are still evolving and may continue to change even after you receive your monies (e.g., if they change how you can spend the money, what a payroll cost is, etc.).