Certifying Your PPP Loan: Proceed With Caution

Demand for loans under the Payroll Protection Program has been through the roof because of the number of businesses suffering through the economic consequences of COVID-19. As Michelman & Robinson has previously reported, the original $349B in funding for the PPP has been exhausted, and the Senate today passed a bill earmarking another $310B for these loans administered by the Small Business Administration.

Those who have applied—or will be applying—for a PPP loan will no doubt be aware of the section in the SBA’s Borrower Application Form that requires a company’s authorized representative to certify in good faith that “[c]urrent economic uncertainty makes [the] loan request necessary to support the ongoing operations of the Applicant.”

While it may seem simple enough to check that box, borrowers must clearly understand that significant penalties and even criminal punishment may attach to loan submissions that do not meet this standard of necessity. That being said, there is a problem: the SBA or U.S. Treasury has yet to issue any guidance that explains the precise circumstances that might make a PPP loan necessary for any given business.

In the absence of such direction, M&R answers some of the questions borrowers will inevitably have about how they can best proceed with caution.

Q. In order to apply for a PPP loan, do I need to fill out a Borrower Application Form that includes certification requirements?

A. Yes, you do. Among other things, you must certify all of the following:

  • You were in operation on February 15, 2020 and had employees for whom you paid salaries and payroll taxes or paid independent contractors, as reported on Form(s) 1099-MISC
  • Current economic uncertainty makes the loan request necessary to support your ongoing operations
  • The PPP funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the PPP rules
  • You understand that if the PPP funds are knowingly used for unauthorized purposes, the federal government may hold you legally liable, such as for charges of fraud
  • You will provide your lender with documentation verifying the number of full-time equivalent employees on your payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight-week period following the loan
  • You understand that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities, and not more than 25% of the forgiven amount may be for non-payroll costs
  • During the period beginning on February 15, 2020 and ending on December 31, 2020, you have not and will not receive another loan under the PPP
  • That the information provided in your loan application and the information provided in all supporting documents and forms is true and accurate in all material respects, and that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law

Q. What might I (or my company) be subject to if I make the foregoing certifications?

A. This is the critical question. Unfortunately (and as stated above), there is a lack of guidance from the SBA or U.S. Treasury regarding the type of coronavirus-related impact to a business’s operations that would render a PPP loan necessary to support a borrower’s ongoing operations. Thus, borrowers must tread lightly when seeking out PPP loans given the potential liability (read: jail time and sizeable fines) for making a false certification, even unknowingly.

Consider this: what if prior to the pandemic being declared, you pulled money out of your credit line, and then, in March, revenues were healthy and you therefore had plenty of cash on hand. Could you nevertheless certify, in good faith, that current economic uncertainty makes a PPP loan request necessary to support ongoing operations just because you forecast a hiccup in accounts receivable for the months of April or May? And what if you do not end up using the loan proceeds as planned? This is where the vague nature of the PPP certification becomes problematic, especially in light of the announcement by the Department of Justice that it will be monitoring the program closely given anticipated widespread fraud.

Q. How can I best protect myself from the perils of PPP certification?

A. The short answer is properly documenting the PPP loan process for purposes of potential liability and risk mitigation. Even though not expressly required by the Borrower Application Form, you would be wise to properly create a record that supports the proposition that the COVID-19 pandemic and resulting economic volatility or hardships to your business justify your loan request. Such documentation could include an analysis of lost revenues, projected future losses, and payroll and other operating expenses (present and future), with an emphasis on how each of these metrics has been adversely impacted by the coronavirus outbreak. Likewise, you could confirm in writing your adherence to corporate procedures and protocols in preparing the loan package, that the submitted financials have been properly reviewed, and, if applicable, that the decision to apply for a PPP loan was made through a vote of your board of directors. Whatever the case may be, if done right, this work can go a long way in providing a measure of protection for you or any company officer that has signed off on the PPP certifications.

Q. If I am ever faced with an allegation that my PPP loan was unnecessary, what can I do to limit any possible exposure?

A. See the above. If crafted properly, your written record can be leveraged to establish why, in your estimation, the PPP loan was necessary under the circumstances. In fact, such a writing could evidence your good faith; serve as the basis of argument to the SBA; and be used as a mechanism to trigger coverage under an insurance policy (e.g., directors and officers liability insurance and the like) or corporate indemnity pursuant to your company’s governance provisions.

Bottom line: if you get it wrong, the certification process could be quite dangerous. But rest assured, there are ways to mitigate any civil or criminal accountability and lean on your insurance portfolio for protection. With respect to all of the above, M&R is here to help.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.