On the heels of the announcement regarding the Interim Stimulus Plan — which amends the CARES Act and offers more funding for both the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) Program — the SBA issued new guidance on April 24, 2020, clarifying certain aspects of the PPP to help eliminate ambiguities encountered in the first round of the program.
Eight Clarifications Surrounding Eligible Businesses for the PPP Program
- Hedge funds and private equity funds are ineligible for PPP financing.
- Other businesses who are primarily engaged in investment or speculation are ineligible for PPP financing.
- All businesses, including portfolio companies of hedge funds and private equity funds, must be mindful that they are certifying as a part of the loan application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” In prior guidance, the SBA indicated that borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.
- Hospitals owned by a government entity that is a business concern or nonprofit organization may be eligible for a PPP loan, even if they are owned by a state or local government, if the hospital receives less than 50% of its funding from state or local government sources, exclusive of Medicaid.
- A business’ participation in an ESOP does not result in an affiliation between the business and the ESOP.
- Businesses that receive revenue from legal gambling are eligible for the program as long as they meet the other requirements of the program (small business concern, less than 500 EEs, etc).
- Businesses currently involved in bankruptcy proceedings (either at the time of application or any time before the loan is disbursed) are ineligible for a PPP loan.
- A safe harbor is provided for any business who pays back the PPP loan by May 7, 2020. In this instance, the business will be deemed to have made the required certification in good faith.
Entities that applied for a PPP loan under prior guidance may rely on the guidance that existed at of the time of the application. However, borrowers should review their facts and circumstances to substantiate their economic uncertainty certification. If it is determined that an entity that received a PPP loan is no longer eligible due to the expanded definition of “necessity,” the SBA will consider the original certification in good faith if the loan is repaid by May 7, 2020.
Ineligible entities that fail to repay the PPP loan by May 7 are at risk that the SBA may challenge the certification, subjecting the entity and its owners to penalties and prosecution.
Does Your Business’ Cash and Access to Cash Qualify You for a PPP Loan?
In establishing whether or not your business has current economic uncertainty and access to capital in relation to the PPP Loan Program, consider your:
- Current cash reserves.
- Current and projected sales levels.
- Current and projected net income and impact on covenant calculations.
- Cash flow projections using current levels of wages, while incorporating current and projected cash flow estimates.
- Current loan documents to determine whether there are restrictions on obtaining other loans.
- Whether traditional sources of loans would be available factoring in current and projected earnings – discuss this with your lender.
- Whether or not traditional loan sources are available - analyze whether obtaining new loans would be significantly detrimental to the business.
We will continue to monitor guidance from the SBA and provide updates.
Contact Dave Sobochan at firstname.lastname@example.org or Adam Hill at email@example.com to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.