Before the forgiveness … comes the audit.
And audits, as we all know, strike fear into the hearts of, well, pretty much everyone, whether financial wrongdoing has been in the cards or not.
It’s not outside the realm of possibility that would-be Paycheck Protection Program (PPP) borrowers might shy away from submitting applications, with a mindset that the regulatory scrutiny just isn’t worth it.
As reported earlier this week, Treasury Secretary Steven Mnuchin said PPP loans for more than $2 million would face full audits, while smaller loans could face spot checks.
“One of the things that will be required is you will have to show a payroll report that you actually spent the money on payroll and other items that qualify for forgiveness,” Mnuchin said in an interview with The Wall Street Journal.
Given the fact that roughly $660 billion, cumulatively, would be extended through the (thus far) two tranches of the coronavirus relief program, that would be quite a significant tally of audits.
The audits would be performed by the Small Business Administration (SBA), and as the Journal reported, “The SBA has two main areas to review: Did the money go to eligible recipients and should those recipients have their loans forgiven.”
The issue is that a Catch-22 may loom for the borrowers. The requirements for the program have changed again and again even as the central tenets still hold: 75 percent of the loans must be used to pay for salaries, and then the loan can be forgiven.
But between the borrowing and the forgiveness may lie a winding path.
The first tranche stated that firms had to prove economic uncertainty made it necessary to get the loans in order to prop up operations.
Against that backdrop, companies such as Shake Shack and other relatively well-capitalized outfits applied for, and got, funds to the tune of millions of dollars.
Now, there will be a range of formulas and computations in place to determine economic need, whether the loans had been used appropriately. The SBA is on the hook for roughly 75 percent of the loan, and the bank is exposed to the remainder.
And the borrower? Well, if those complex formulas somehow determine that forgiveness is not extended, then the company has an additional financial burden in place to satisfy.
The caution that small and medium-sized businesses (SMBs) may show, even amid significant economic headwinds, came up in conversation between Karen Webster, Planters First Bancorp CEO Dan Speight, Ingo Money CEO Drew Edwards and Opportunity Fund CEO Luz Urrutia.
Part of the problem for the current and future PPP lending lies with proving the actual financial need for the loans, as companies’ situations are, to put it mildly, fluid.
“It’s as if [the government] suddenly turned around and said, no, no, no, wait a minute. If you’re not on bankruptcy’s doorstep, then you better not take this money or we’re coming after you,” Edwards told Webster.
Speight remarked that “there are businesses that their revenue has really not been tremendously altered during this time, but they got the loan because they know what’s going to happen over the next two and a half months,” and beyond.
The read across may be ominous. As we found in the latest “Main Street on Lockdown” study, a growing number of SMBs are opting to apply for funds. Stable SMBs that were weathering the pandemic’s impacts better than their “unsure” or “unstable” counterparts were the most likely to have applied for and received PPP loans.
As recorded, PYMNTS found that 43.2 percent of SMBs owners who are sure their businesses will survive the coronavirus pandemic have been granted PPP loans.
It’s conceivable that later on, audits would determine that they’d not needed the loans, given their relative stability … and those loans might not be forgiven. It’s enough to make SMBs think twice about tapping a source of funding meant to give them shelter from the storm.