Under the Paycheck Protection Program, businesses may be eligible for low-interest loans from the U.S. Small Business Administration, which may be forgiven if the business meets certain conditions.
The limited guidance provided to date by SBA regarding loan forgiveness has made it difficult for borrowers to know exactly where they stand—both on the threshold issue of whether they certified in good faith that the loan was necessary and, assuming they did certify in good faith, on the issue of whether and to what extent the loan will be forgiven. But some things are known.
Regarding certification, the most recent SBA guidance, in FAQ 46, provides that certifications for loans under $2 million will be presumed to have been made in good faith. Those over $2 million will be subject to review by SBA unless borrowers take advantage of the “safe harbor” provision explained below.
The SBA guidance offers businesses with loans over $2 million two options regarding certification. For businesses that are uncertain that they can satisfy the good faith standard, FAQ 47 provides a safe harbor under which the business will be presumed to have certified in good faith, no questions asked, if it returns the money by the new safe harbor deadline of May 18. Businesses that do not avail themselves of the safe harbor option will be subject to review by SBA to determine whether they had an adequate basis for certifying their need for the loan.
To prepare for SBA review, see the checklist prepared by ASA outside counsel explaining how to document the economic uncertainty at the time of certification, the extent of decline in business, increased expenses, and having to cover payroll for longer periods as clients pay more slowly. Staffing firms should consider retaining expert counsel to review the documents and support their good faith arguments. If, after review, the SBA finds that there was an inadequate basis, the borrower will be ineligible for forgiveness and will be notified that it must repay the outstanding loan balance. Importantly, the guidance says that if the borrower repays the loan after receiving such notification, the SBA “will not pursue administrative enforcement or referrals to other agencies…”.
Regarding loan forgiveness, assuming certification was made in good faith, borrowers will be eligible for forgiveness based on how the loan money was spent, including the percentage that was spent on payroll as compared with other permissible expenses, and to what extent the businesses had reductions in headcount or compensation that would reduce the forgiveness amount. Here, too, documentation will be critical. The ASA issue paper “Financial Assistance Options for Staffing Agencies Under the CARES Act” provides a detailed explanation, based on guidance to date, of how the forgiveness rules work.
Despite pleas by ASA and other business groups for the government to provide comprehensive guidance, its failure so far to do so leaves many technical questions unanswered. Thus, staffing firms, in consultation with their own advisers, must make their best judgments on how to proceed until further guidance is issued.
