Applying for a “Loan” under the Payment Protection Program?

The loan application for the Payment Protection Program (PPP) seems simple enough, and I do believe that Congress intended it to be. So then, why are many of my clients having difficulty and feeling so much stress about it? Well, the process of actually doing these applications has been revealing as some of the consideration that should be applied provides insight into what is causing this angst. Sometimes it’s the simple things that provide the most challenge and also the opportunity to reflect deeper.

The PPP application requires certain certifications which come directly from the CARES Act. One is for a business still in operation to certify that: “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

While on the surface, one might say that any small business or nonprofit is currently facing significant uncertainty or is soon to be, I have come to feel that perhaps the certification was meant to apply to businesses more directly impacted by the pandemic shutdown (e.g., retail operations, bars and restaurants, etc.) than other businesses, like professional service businesses, that may be working at full strength, even if from home.

For my nonprofit clients, it may be that those still engaged with reimbursable grants and contract work may need less of these funds, while others, like a symphony orchestra with no audiences left to entertain, may be in dire financial need. Think about it. If you are a nonprofit recipient of a grant (cooperative) agreement that is in full swing, why would you take out a loan to pay employees who can be charged to the grant with the government covering the costs? You certainly shouldn’t be thinking that the loan will be forgiven unless you ultimately forgo charging the federal award.

While the standards to get a loan may be somewhat subjective and the calculation of 2.5 times payroll cost could appear lucrative to some, I think we need to ask: “are these truly funds that will make a difference in the continued success of our organization?” Or, at least, can you say that the funds are needed to keep key people employed whom otherwise you would not be able to afford?

So let’s say you answer this question, “YES.” Now you need to understand that the purpose for which you can actually use the loans is fairly more restrictive than the 2.5 times calculation you used to come up with the amount of the loan on the PPP application. And then forgiven amounts are subject to even further spending restrictions.

So this may not be the “free” money many are racing to get, as the funds you received you may not be legally able to spend.

I am not an attorney, but might there be any legal exposure to consider as well? For example, such as under the False Claims Act? As business owners and leaders, should we consider that a misrepresentation in the application could result in such a liability? Shouldn’t we at least be moving away from taking the most aggressive positions so as to get the most money possible under PPP whether it is needed or not?

And for my nonprofit clients, I continually concern myself with public opinion. I would surmise that a few anonymous tips may incite reporters to use the Freedom of Information Act to review the PPP or go to GuideStar for a Form 990 to determine if nonprofits with solid reserves have applied for and received large PPP loans and, worse yet, that a bulk of the loans was later forgiven.

This is not to say that your business or nonprofit should feel as if your participation in the program is not justified. However, I do think some cash flow forecasting as to the possible uses of the funds, while including all sources of funds that may be available to you (such as government grant/contracts, foundation support, individual contributions and earned income), and the most appropriate place to which to charge the expenses, including the use of the PPP and EIDL programs, would be a solid exercise to undertake, and would allow you to support your PPP request in a more responsible manner.

And this aggressive behavior may be what gets us to the questions that continue to be raised about independent contractors.

What I believe the federal government intended to affect with the loan program was something like: “let’s provide federal funds to cover two months (8 weeks) of payroll during the crisis for those employees who need to be working.” And for those who have no work to do at their companies, “let’s get unemployment increased in time and amount and make it easy for those furloughed or terminated employees to qualify.”

So why are we now hearing that you can include independent contractors in what I believe was meant to be a simple calculation of 2.5 times “payroll costs”?

After listing payroll costs as “salaries and wages paid, health and retirement benefits and severance pay,” the paragraph that followed in the CARES Act (paragraph (bb)) says: “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment and that is an amount of not more than $100,000 in 1 year, as prorated for the covered period.”

This seems to have been interpreted to mean that the employer gets to add the amounts it paid to independent contractors on Form 1099 to their W-2 employee payroll cost. However, I believe that this paragraph (as indicated by its numerical separation) is simply a set-aside to give permission to sole proprietors and contractors to apply for the PPP separately, as it specifies “recipients” of the payment not persons making the payment.

While, what has been promulgated so far by the SBA may have caused more confusion than clarity, my position is better supported by a Q&A with the SBA that I just read. It ASKS, “Should payment that an eligible borrower made to an independent contractor or sole proprietor be included in the calculations of the eligible borrower’s (PPP) payroll costs?” And it ANSWERS: “No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP if it satisfies the applicable requirements.”

Unfortunately, most banks with which I have been working are asking for the applicant to include the cost of contractors and provide a copy of the 1099s. In fact, they specifically list in their “calculators,” which are meant to help the borrower arrive at the loan amount, a line for 1099s. So while you may receive a loan amount that includes these 1099s (in error or otherwise), the question will be, “can you spend it on 1099 employees?”

So, what’s the harm in requesting more funds than you can spend? Well, as I have begun to see banks becoming overwhelmed with PPP requests (Wells Fargo stopped taking applications for a few days), I have also become concerned about the possibility that many of those businesses and nonprofits that are actually at risk may get left out.

And could the lure of “free money” for small businesses and NPOs that don’t fully meet the PPP standards backfire and get them in trouble later?

For the aforementioned certification, the SBA has not provided any definition about the nature or extent of the required impact to operations that would make the loan request “necessary to support ongoing operations.” This should make some business owners a bit nervous about making or accepting this certification.

My recommendation is that, in your rush to get the application in, please pause to better understand the restrictions placed on spending, the requirements for forgiveness of the loan, and your need to get every dollar that is the result of the calculation the application formulates for you.