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Borrower Certification & Loan Forgiveness

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The following is based on a panel discussion held on Tuesday, May 5, 2020.  Lynn Harton, Chairman and CEO of United Community Bank, sat down with with Brad Rustin (Partner with Nelson Mullins), Rich Bradshaw (Chief Banking Officer, United Community Bank) and Marion Crawford (Chief Marketing Officer, United Community Bank). All comments made during the webinar were current as of May 5, 2020, but some details may have changed since. At the time, United had processed approximately 11,000 loans under the program for more than $1.2 billion in funds.
 
As PPP borrowers are now receiving their funds, many additional questions have come up regarding SBA and Treasury guidance. The panel reminded listeners that the PPP had two primary goals: to focus on the small businesses that make up 75 percent of America’s workforce and provide immediate funding resources for those businesses to maintain cash flow, employment, and ultimately, payroll. By keeping these goals in mind, the guidance from the SBA and Treasury Department regarding certification and forgiveness available at this time can be better understood. As additional guidance is provided, we will continue to update these answers and encourage you to reach out to your banker.
 
What do I need to know about borrower certification?
 
Following the first round of funding, many questions arose about businesses that were approved that may or may not truly need the loan based on their access to other types of capital. All applicants were required to make a “good faith” certification that they were impacted by COVID-19. But due to the speed of the program, a typical SBA 7a requirement that the borrower demonstrate they had exhausted all other means of capital was suspended, leading to some of the uncertainty.
 
Many borrowers have wondered if this means they should have liquidated all assets, including personal ones, prior to applying for a PPP loan. The answer may be complicated depending upon the borrower’s circumstances, but generally, the government does not expect business owners to have sought unreasonable sources of capital prior to applying. However, if your business did have access to a line of credit and did not make attempts to utilize it, it may be problematic in further review. If you did have access to capital, it is important to document why it was unreasonable for you to have used it instead of the PPP loan funds.
 
Any potential auditing or review of loans will also likely expect that borrowers had needs beyond just basic impact. The certification must address specific financial needs that arose due to the crisis and evidence that you were having trouble meeting those obligations. This evidence would demonstrate real necessity.
 
What to think about with regards to the “good faith” certification of needs?
 
If your business was able to operate relatively normally—stay open, continue serving customers, bring in revenue—it will be more difficult to demonstrate your financial need. Examples might be grocery stores or restaurants that were already heavily reliant on takeout business. If you can’t demonstrate real evidence of negative impact, it would be wise to seek legal counsel who may be able to better understand your specific need. 
 
We also caution borrowers against any lavish spending during this time, because of a perception that funds are not being used to address existing needs, but instead put toward a larger purchase—equipment, expansion, etc.—that is not essential during this time. Any expenditures outside of keeping your facility open or your employees paid will cause concern.
 
What if we received funds but our impact wasn’t as severe as anticipated?
 
If you expected necessity, applied for a loan as needed, and used funds as instructed, then you meet qualifications. However, if you used PPP loan funds, and essentially increased capital, you need to go back and see how you used the money versus revenue that you received. Was it truly necessary? If you used the PPP loan funds to create a surplus that could be subject to an audit.
 
If you still have serious concerns about your ability to meet these criteria, borrowers have until May 14 to return funds without questions. We encourage you to talk to your attorneys and accountants if you have concerns. After May 14, loans could be subject to additional scrutiny. 
 
Which businesses are most likely to be audited by the SBA and Treasury?
 
The Treasury Department has said it will audit all loans over $2 million and that any loan amount is subject to further examination. The average loan size in round one of funding was $206,000, so if your loan was over that amount, it’s reasonable to think it might receive further review. The SBA will also look at funds received versus funds submitted for loan forgiveness as an indicator of how you may have used the money.
 
Preparing documentation of all decisions, evidence of need and use of funds is critical. We recommend that borrowers open a separate account for the funds in order to specifically track how the money is used. Other helpful details to document:
  • When you received and used funds
  • Financial condition of company
  • Staffing levels
  • Evidence of inability to pay creditors
  • Changes of service between clients
What is important to know about the forgiveness aspect of the program? 

In order to have some of the loan amount forgiven, borrowers must use funds within 8 weeks of receiving them. If funds are spent on qualifying expenses, the loan can be forgiven, and you won’t owe taxes on it. As of now, the SBA has been firm on covering only expenses from that 8-week window—costs like payroll, pre-existing mortgage or rental lease or utility payments (with service prior to February 15, 2020). Payroll must account for 75 percent of qualifying expenses.
 
At this time, it appears that all funds must be used prior to June 30, 2020, and forgiveness of the loan depends on use within that initial 8-week period. We caution borrowers against abnormal expenditures during that 8-week period (i.e. hazard pay, bonuses), but do encourage businesses to consider running an abnormal payroll on the last day of the 8-week period to fully capture use of funds during that time.
 
There is no doubt that these are uncertain times, and a PPP loan will help many small businesses keep their doors open. We highly encourage you to document all aspects of your loan, from start to finish, in the event that it comes under further review. As some of this guidance from SBA and Treasury may continue to change, we expect additional questions may arise. If you have questions about your good faith certification for your PPP loan, we recommend you reach out to your legal advisor for assistance. If you have any other questions, reach out to your banker and know that we’re in this together.

United CARES Act Resources for You

COVID-19 has significantly impacted nearly every business in our community. We have created CARES Act resources and tools to provide you with guidance to help navigate this unprecedented time.

Legal Disclaimer: These programs were created to provide an overview of certain aspects of the PPP program. The information provided does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information contained herein is subject to change and may not constitute the most up-to-date information. It is recommended that you contact your legal advisor to obtain advice with respect to any particular legal matter, and you should not act or refrain from acting on the basis of information contained herein without first seeking advice from your attorney. Only your individual legal advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. All liability with respect to actions taken or not taken based on the contents hereof are hereby expressly disclaimed. The content herein is provided "as is;" no representations are made that the content is error-free.