Borrowers Certification of Economic Need and Uncertainty for PPP Loan – Checklist of Considerations

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Updates as of May 6: the SBA extended the date for borrowers seeking to repay PPP loans from May 7 to May 14. Issuing an updated FAQ (FAQ #43), the date was extended effective immediately. The SBA indicated in its response the following: “SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.”

On May 1, 2020, we released an article addressing the economic uncertainty with a PPP loan, and this article follows up on that topic. The following is a list of questions and other considerations for borrowers, as it relates to their Economic Uncertainty certification for the PPP loan. This list is not meant to be all-inclusive. Other questions and considerations may be appropriate. 

Timeline – Uncertainty

  1. Orange marking on checklist box with pen, Checklist concept, copy spaceDid the borrower rely on initial guidance published by the SBA or Treasury that assisted them in determining if they qualified for the PPP loan and met the Economic Uncertainty Standard?
    • Has the borrower considered the new guidance issued prior to May 7, 2020, as well as the current economic conditions subsequent to applying for and receiving loan proceeds?
    • If yes, did this new assessment result in different conclusion of their need for the loan to support ongoing operations?
  2. At the time of the PPP loan application, did the borrower have adequate guidance from the SBA that defined the economic uncertainty certification?
  3. Did the borrower expedite their loan application process due to their concern that the funds would be depleted?
  4. At the time of the loan application, did the borrower face uncertainty of when operations would return to pre-pandemic levels based on all key stakeholders and government actions over closure of the economy being resolved?
  5. Does the borrower face uncertainty, as of May 1,2020, of when operations will return to pre-pandemic levels based on all key stakeholders and government actions over closure of the economy being resolved?
  6. Has the borrower projected economic need through the end of the projected recession period for its business?
    • If “yes,” does the projection indicate economic uncertainty? For example, does the projection indicate that you will need to borrow additional capital or seek additional investment to maintain the business operations at an appropriate level and meet current and projected future financial obligations?
  7. Has the borrower considered a “worst case” projection, and does this projection indicate an economic need?

Balance Sheet – Uncertainty

  1. Does the borrower have debt agreements that require ongoing debt service payments?
    • If “yes,” does the debt agreement have covenants or other terms that are at risk of being violated, causing the lender to call the debt?
  2. Does the borrower have access to other capital that is at a similar borrowing cost and similar terms, including consideration of the potential of partial or full forgiveness provisions and the repayment terms? As with the PPP?
    • Does the amount of capital that is accessible meet the future, projected economic need?
    • Does the other source of capital have better terms than the PPP loan?
    • Does the borrower have immediate access to capital from public or private equity sources?
  3. At the time of the loan application, did the borrower face uncertainty related to the collection of accounts receivable or the value of existing inventory or other assets on their balance sheet, effectively reducing the equity and/or net working capital in the business?
    • Did the borrower assess whether their balance sheet reserves were adequate for all assets they believe could be impaired?
  4. Does the business own significant property plant and equipment that could have a significant reduction of value, causing the borrower to face uncertainty in their collateral base and in their ability to have access to capital in the future?
  5. Based on future projections of financial performance through the end of the recessionary period caused by the pandemic, does the business have enough cash and working capital to finance the business?
  6. Does the business need to make additional investments in its technology systems (IT); equipment; or other services to meet the new safety and sanitation standards for employees and key stakeholders?
    • Did the business have a reasonable estimate of the additional investment needed at the time of the loan application?
  7. Does the borrower reasonably believe they face permanent losses or impairment as a result of the pandemic, which they believe will cause them to need to make additional or new investments in order to continue ongoing operations into 2021 and beyond?
  8. Does the borrower face economic uncertainty as to the loan forgiveness that will be allowed, and what expenses will and will not qualify, and the ultimate impact on their balance sheet?
  9. Are there other contingencies or unrecorded liabilities such as retirement obligations, buyout obligations, or environmental contingencies that would become due in the event the borrower could not support ongoing operations?

Income Statement – Uncertainty

  1. At the time of the loan application, did the borrower experience a reduction in revenues in comparison to a prior period or in comparison to their budget or other expectations? If so, what were the reductions?
  2. At the time of the loan application, did the borrower experience a reduction in profitability in comparison to a prior period or in comparison to their budget or other expectations? If so, what were the reductions or changes in profitability?
  3. At the time of the loan application, did the borrower expect revenues to decline or profitability to decline in the future?
    • Did the borrower document those expectations and projections and the related assumptions?
  4. At the time of the loan application, did the borrower believe there was uncertainty in the long-term viability of certain customers and their demand for products or services?
    • Did the borrower project the revenue changes that could occur from these uncertainties?
    • Can the borrower quantify the projected (or actual) decline in revenue from its top customers?
  5. At the time of the loan application, did the borrower face uncertainty related to their access to certain key vendors or suppliers and those suppliers’ ability to provide products or services in the future?
    • If yes, did the borrower include the potential financial impact of having to source the products or services from an alternate vendor or not being able to get those products or services at all?
  6. At the time of the loan application, had the borrower either reduced their employee headcount or had plans to reduce their employee workforce based on the current uncertainties faced?
  7. Has the borrower factored any additional ongoing costs associated with new safety and sanitation standards, including transitioning to a remote workplace for some or all employees that will be implemented to protect their employees and their customers from the spread of the COVID-19 virus?
    • Has the borrower quantified and documented what those ongoing costs might be and the impact on their financial statements?
  8. Does the borrower face uncertainty as it relates to the tax expense impact of these various stimulus provisions and tax law changes, given the guidance that continues to be published and changed?

Other Uncertainty

  1. Does the business have plans to replace equipment or facilities or make other investments, including planned owner succession, key employee retention, and need for capital to meet these strategic needs?
    • If “yes,” has the borrower considered the cash flow implications and the strategic needs of the business?
    • Has the impact of the pandemic caused economic uncertainty on the ability of the borrower to pursue these strategic needs that are important to the viability of the business?
  2. Does the borrower face uncertainty around retaining a work force and/or management talent pool due to recent reduction in employee headcount or wage cuts that could impact the future viability of the business?

Summary

After reviewing these questions and providing thoughtful and documented responses, a borrower should seek the advice of their legal counsel and other advisors to determine if they meet the standard of the certification of Economic Need for their PPP loan.

The foregoing information represents the current view of Sikich as of the date of publication and is subject to change at any time without notice of Sikich. This document and its contents (i) are provided AS IS without warranty of any kind, express or implied, (ii) should not be interpreted as an offer or commitment on the part of Sikich, and (ii) do not constitute accounting, business, financial, investment, legal, tax, or any other professional advice or services.  This document and its contents are not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business.  Sikich does not guarantee the accuracy of any information presented. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on the foregoing.

About our authors

Tom Bayer

Tom Bayer

Thomas E. Bayer, CPA, CExP, has more than 25 years of experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich offices. Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He puts his business succession planning abilities and knowledge to work firm-wide, serving clients in advisory services across the country.

Jim Brandenburg

Jim Brandenburg

Jim Brandenburg, CPA, has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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