Daily Local News (West Chester, PA)
Basic advice for paycheck protection program borrowers
Many businesses and institutions have received forgivable loans from the federal government under the Paycheck Protection Program (PPP). The PPP program has injected about $660 billion into the economy.
These loans are administered through local banks. If the borrower meets the qualifications of employment retention and payroll maintenance, substantially all or a portion of the loans spent on permitted uses may be forgiven. If not forgiven, the loans bear interest at one percent per annum and mature in two years. Repayment of amounts not forgiven starts in the seventh month following funding, but interest does accrue during the first six month periodduring which no payments are required.
The federal government will purchase the notes from the local banks. So, the interest will be owed to the federal government. The forgiveness calculation (loan proceeds spent on payroll, mortgage interest, rent and utilities, possibly reduced by failure to satisfy requirements related to employment retention and maintenance of payroll) period is eight weeks from receipt of the money.
Will the loans be forgiven? The Small Business Administration (“SBA”) has not yet issued regulations. When they come, we can expect a certain element of complexity and difficulty. A major complaint of the PPP program when it was unveiled was that there was ambiguity and vagueness caused by the haste with which the program was put together. Now the SBA will have had a month to iron out the wrinkles and think through regulations. Hopefully they will not be too complicated, and mercifully, not too burdensome.
Here is some advice on how recipients can protect themselves:
1. Borrower should put the proceeds in a discrete account, limited only to the PPP loan proceeds. This will create a little more paperwork, but borrowers who seek forgiveness of loans are going to have to be completely transparent and make the information easily obtain able. Document, document, document. All disbursements, whether for employment, mortgage interest, rent, utilities, must be clearly documented. We recommend creatingnew, separate general ledger accounts and a separate file for these records, in addition to whatever business records the borrower usually maintains.
2. We can anticipate that the SBA is going to audit the application of loan proceeds. The simpler the borrower makes that process, the better off the borrower will be. If the auditors have to dig through inconsistent or hidden information, that will generate suspicion and convey a need to the auditors that additional work must be done.
If, on the other hand, the borrower has clear records, check numbers, amounts, payee, etc. on a specific ledger, the audit will be relatively simple and forthright. That will give the auditor confidence that the borrower has accurate and honest records. As with any audit, the person being audited must be well prepared for the discussion with the auditors, conveying clear information and showing no inclination to hide or distort facts.
3. A borrower should be conservative in its projection of the amount of the loan to be forgiven. In the month since the CARES Act was enacted, the SBA has modified some of the rules on forgiveness, and may continue to do so in the future. For example, the SBA implemented a rule (not included in the statute) that at least 75% of loan proceeds must be used for payroll costs. Any deficit below 75% will not be forgiven. Additional regulations clarifying criteria for utility and rent expense forgivenessare also likely to affect the end result. Err on the side of caution. Not only is it the prudent strategy, but doing so will favorably impress an SBA auditor.
Following these simple steps will go a long way toward protecting PPP borrowers from complications down the road.
If you are a small business owner who needs assistance, Lamb McErlane PC can help. Contact us at 610-430-8000. www. lambmcerlane.com.
James E. “Jim” McErlane is a Senior Partner and one of the founding members of Lamb McErlane PC. His practice is concentrated in the areas of general business and governmental regulations. jmcerlane@ lambmcerlane.com. 610701-4404.