Updated on September 3, 2020.
The deadline for Paycheck Protection Program (PPP) applications lapsed in August and while the country waits on Congress to pass another stimulus package, many employers have turned their attention to applying for loan forgiveness. The requirements for forgiveness have shifted since the program started, as Congress relaxed certain rules to give small businesses more flexibility during this trying time. These changes have left many small business owners confused about how to spend the loan proceeds in order to qualify for forgiveness. Unfortunately, opportunities to commit fraud are rife, and some small business owners may not even realize their PPP fund practices are fraudulent.
Here are deliberate actions you should take to ensure you spend the PPP proceeds without putting your business at risk.
Pay your employees legally and consistently
There have been multiple reports of business owners paying employees throughout the duration of the covered period—or increasing salaries and/or work hours during the covered period—only to garnish wages later. This is illegal.
Here are a few practices you should never implement; do not:
- Ask employees to pay back portions of their wages after the covered period ends.
- Ask employees to work for free after the covered periods ends to “make up” for the wages they earned during the covered period.
- Garnish wages after the covered period to “make up” for wages paid during the covered period
Employees who are concerned for their jobs may not be empowered to speak out and may feel pressured to comply with dubious employer requests, but make no mistake: activities like this should not be part of your operation. Make sure you communicate and implement clear, consistent, and legal policies surrounding compensation; do not deviate from these in order to access PPP funds.
Certify, in good faith, that you need your PPP loan.
On April 23, the Treasury Department issued additional guidance on who exactly qualifies for PPP loans. Responding to criticism that PPP funding was being awarded to businesses with access to capital outside of the PPP, like Shake Shack and the Los Angeles Lakers, the new rule discourages larger companies with access to other sources of liquidity from monopolizing the limited pool of funding.
The Treasury emphasized the requirement that PPP borrowers certify in good faith that the loan is “necessary to support the ongoing operations of the applicant.” The guidance particularly calls out that “companies with large valuations and access to capital markets” are “unlikely” to meet that requirement.
Additionally, the Justice Department has begun investigating companies to ensure they did not apply to the program with misleading information, and Treasury Secretary Steven Mnuchin has stated the Small Business Administration (SBA) will audit all PPP loans of more than $2 million for any criminal liability—keep in mind that all loans are subject to review, but the mandatory audit only applies to larger loans.
What you can do:
- Carefully review the Treasury’s guidance and program eligibility rules. Double-check affiliation rules and qualifications based on your size, industry, and entity type.
- Take a look at your current business activity and other sources of liquidity, and ask yourself if they are sufficient to keep your business going without a PPP loan.
- While the CARES Act waives the requirement that applicants are unable to get credit elsewhere, if you do apply for other loans, have documentation handy to show you considered other sources.
Make sure every business only receives one loan.
Many businesses have applied for a PPP loan with multiple lenders to increase chances of receiving funding. However, you are required to certify in your application that you have not and will not receive another PPP loan. Thus, you must be careful to only accept ONE loan corresponding to the tax information you submitted (either your employer identification number, Social Security number, or your tax ID). While this may seem like a no-brainer, audits have revealed that over a billion dollars of PPP funds have gone to companies that have received multiple loans.
Applying for PPP loans for multiple affiliated businesses can also be complicated. The rules vary based on total number of employees, industry, and other factors.
What you can do:
- If you have already submitted more than one PPP loan application, make sure you only sign loan documentation for one of those loans.
- If you somehow ended up with two PPP loans for your single business with the same tax ID number, notify your lender and repaying any additional PPP loans.
- For those with multiple affiliated businesses, it’s unclear whether getting multiple loans for multiple businesses is acceptable under the PPP. So if you have already received a PPP loan for one of your businesses, try looking for other sources of relief for additional business needs. Our Small Business Relief Finder can help.
Use your loan for working capital.
Many PPP applicants have questions on how flexibly they can use PPP funds outside of payroll costs and other eligible costs specified in the CARES Act. While the CARES Act stated which expenses are eligible for forgiveness, it was less clear about what expenses could be covered if a small business is not seeking forgiveness.
John Asbury, the chief executive of Atlantic Union Bankshares in Virginia, told the New York Times, “As long as they’re using the funding for the operating expenses of the business, our interpretation—and we think it’s clear—is yes, you can use it as effectively a working capital loan.”
Note that lenders may differ in their approach to permissible use, and you should check with your individual lender to understand what you may use your PPP funds for outside of payroll and other eligible costs.
What you can do:
- Check with your lender on any other permissible uses for your PPP funds. For example, some lenders may determine that a use is not eligible for forgiveness but is still eligible for use under the PPP.
- If you need the PPP money for business costs outside of payroll and other approved expenses, make sure you are using the funds as working capital, or in other words, to support the day-to-day operations of your business.
- Still keep track of everything you spend it on, even if you may not be eligible for loan forgiveness.
- Spend what you can, and either return what you don’t spend (there’s no prepayment penalty) or make a plan to pay back the low-interest loan within two years. Keep in mind that the 1% interest accrues on a daily basis, even while payments are deferred the first six months of the loan.