PPP Loans: To Take or Not To Take?

Many small businesses are struggling right now. And PPP loans may offer some much-needed relief under the circumstances. But how do you know if it is a good idea to accept the loan for your company?

Unfortunately, the only answer is “it depends.” There is no one-size-fits-all response because each company—and the effect of COVID-19 on each company’s business—is different. However, SBA’s recent guidance has provided a few crucial considerations for making this decision.

Many businesses meet the general eligibility requirements for assistance from SBA’s Paycheck Protection Program Loan Program. But as we have learned from recent events, that does not mean they should all accept PPP loans. Businesses “still must certify in good faith that their PPP loan request is necessary” to support their ongoing operations.

In SBA’s most recent guidance (which we discussed here), SBA has announced that it will be reviewing all PPP loans over $2 million dollars, “in consultation with the Department of the Treasury,” in order to “ensure PPP loans are limited to eligible borrowers in need[.]” Based on that same guidance, those below $2 million are unlikely to be reviewed. We’ve also commented on the potential consequences of taking unnecessary PPP loans. As we cautioned, false certifications could lead to grave consequences (even including jail time).

Thus, all businesses seeking PPP loans (especially those in excess of $2 million) should carefully consider whether their “need” for the loan would withstand a more extensive SBA review before accepting. While each business has unique circumstances affecting this analysis, SBA’s guidance has indicated some general considerations that every business should review before making this call.

  1. Does the company have access to capital markets or other sources of liquidity that can be accessed both quickly and without significant detriment to the company’s business?
  2. Is the company located in an area that has been hit especially hard by the COVID-19 pandemic or an area with more stringent lock-down orders than others?
  3. Is the nature of the company’s business or the industry in which the company operates one that has been significantly impacted by this pandemic, and if so, how likely is the industry to bounce back in the future?
  4. Has the company had to furlough employees or cut salaries or is it considering either option at this time?

Now, let’s look at an example of how these considerations may come into play. Let’s call the company applying for a PPP loan “Dwight’s Garden Parties, LLC,” and let’s assume that Dwight’s is applying for a $2.5 million PPP loan.

Dwight’s is a Connecticut company that provides party venues, food and drink, serving staff, and entertainment. Its capital has historically been raised privately, through its 20 shareholders, most of which are the family and friends of the founder. Dwight’s has around 100 employees, who work the events on an as-needed basis. Currently, 75% of Dwight’s employees are furloughed, with the other 25% continuing to provide maintenance services at the company’s venues.

Because Dwight’s is applying for a loan in excess of $2 million, it should anticipate that SBA will review the loan. But Dwight’s has a lot going for it to support its need for the loan.

First, while Dwight’s may have access to private capital, it is unlikely that such capital can be drawn quickly. However, SBA may look to see whether any capital has recently been drawn from the private sources to determine whether it is in fact accessible.

Second, Dwight’s is located in Connecticut, which, according to the CDC, has over 34,000 cases of COVID-19. But another thing SBA may consider is whether the company operates in more rural or urban areas.

Third, party planning is undoubtedly an industry that has taken a hit from this pandemic, and it is not likely to bounce back quickly even as stay-at-home and lock-down orders are lifted. And fourth, Dwight’s has already had to furlough employees. Thus, Dwight’s need for the PPP loan is likely to withstand scrutiny. Companies considering a PPP loan would do well to conduct a similar analysis.

Questions about this post? Email us or give us a call at 785-200-8919.