After a rocky launch of the PPP loan program on Friday, April 3rd, many banks and lenders have started to sort out their internal processes and client-facing applications in order to start the process of providing much-needed relief to businesses and organizations. The SBA and Treasury have also continued to release additional guidance on these programs that is heavily focused on providing clarity on the loan amounts and lending process; however, there is still not much in the way of guidance on the forgiveness portion of these loans.
Some key updates from our experience, the most recent SBA Guidance and other news
Updated SBA Frequently Ask Questions
Around 10:00 pm eastern on April 6th, the SBA released updated Frequently Asked Questions (FAQ) on the PPP loans. These updates included:
1. A minor expansion (or clarification) for organizations with more than 500 employees that may be eligible for PPP Loans. Included as eligible organizations are business that are smaller than the SBA Size Standard (for both employees and revenue) and a clarification on use of the “alternative size standard,” which a business has less than $15,000,000 in tangible net worth (equity) and less than $5,000,000 of net average income for the prior 2 fiscal years. It is unclear but unlikely this expansion will be for any 501(C)(3) organization.
2. The SBA clarified that borrowers, not lenders, will be ultimately responsible for navigating the tricky SBA Affiliation rules. These rules are largely based on “control” and are more facts and circumstances driven rather than bright line ownership tests. It did give some relief to allow for changes in minority shareholder control (our understanding is that more than 1 person can be in control per SBA Affiliation) by waiver of rights that would otherwise give control.
3. The SBA confirmed that only compensation is limited to the $100,000 per person threshold (salary and wages). Amounts for group health insurance, retirement benefits, or state and local taxes can be included above this amount.
4. The SBA clarified documentation requests for clients on a Professional Employer Organization (PEO). While they would prefer payroll tax returns, other documentation is acceptable.
5. The SBA confirmed that only one authorized representative needs to sign (electronically confirmed allowed) rather than all 20%+ owners, as was required on the original application.
6. The SBA stated that borrowers can calculate their payroll costs using either the last 12 months or 2019 calendar year. This is a big clarification. The issued regulations had both (within the borrower area it said last 12 months and within the lender area it said 2019 calendar year). Our approach has been to use 2019 calendar year unless there is a valid business case to switch.
7. The SBA confirmed that Independent Contractors on Form 1099 are not includable as part of payroll costs for a borrower, but that these contractors can apply themselves. Prior SBA guidance indicated they can start to apply on April 10, 2020.
8. The SBA confirmed that borrowers should use gross pay for calculating payroll costs. The drafted law and initial regulations had left some confusion as to if borrowers should use net or gross pay. The ambiguous and somewhat contradictory to intent wording has been interpreted by the SBA to mean that the amounts should be calculated without regard to the employee deductions and withholdings, meaning gross pay. Further, the SBA confirmed that employer FICA is not a covered payroll cost. As some people have used calculations provided by their payroll provider, they should check to make sure they are using a calculation in compliance with the most recent guidance.
Status of Major Banks and Updates on Documentation Requests
As we have assisted clients in the analysis of these programs, we have seen the following status for “major” banks. This information is only based on our experience.
1. Chase – as of today, Chase has a link available for clients to submit a “pre-application” or expression of interest. Chase is limiting these to customers with pre-existing relationships. The link can be found here. Our experience is showing about 48-hour business turn around from when a client submits the expression of interest to further requests from Chase – meaning those who submitted Friday are being contacted today.
2. Bank of America – Bank of America was the first major bank to accept pre-applications on Friday Morning. Some clients that submitted early Friday were contacted for follow up documentation as of Monday AM. Bank of America is limiting their applications to clients with a pre-existing relationship but have relaxed their standards from requiring both a business lending and banking relationship to just a business banking relationship. Information can be found here.
3. TD Bank – unlike other banks, we note that TD Bank does not have a pre-application or expression of interest but a direct link to their application. It can be found here. It is possible as they have grown in number of applications this has changed. TD Bank is requiring a pre-existing business banking relationship.
4. Citibank – Citibank launched their expression of interest on Tuesday, April 7th. The link is here. Citibank is requiring a pre-existing checking relationship, and we have not heard of any further contact from Citibank on any expressions of interest.
5. Wells Fargo – Wells Fargo has claimed it is limited to providing these loans for only up to $10,000,000,000 as a result of sanctions from their prior account opening scandal from 2018. As a result, as of today, they are no longer accepting applications. They had a brief window open.
This is only a summary of banks to date. Many other banks and local banks may have more progress, but one common theme we see is most banks want a pre-existing relationship. This has led to many clients asking us where they can potentially turn for PPP Loans if their bank is not responsive or moving at the speed clients would like or not offering loans. Some clients are searching Google or other resources, but we advise to make sure you are dealing with a reputable bank or lender and not providing your information to anyone that may steal it.
As we have seen, some of these applications move, we are seeing some (but not complete) consistency in requests. Based on what we have seen, borrowers should be prepared to have available:
1. 2019 W-2
2. 2019 W-3
3. 1st – 4th Quarter Form 941
4. 2019 Form 940
5. A February 2020 Payroll Journal
6. 2019 Financials or tax returns
We also note many banks have supplement forms they are requiring, which could include alternative calculations of your loan amount on banks prescribed forms or intended uses of these funds. Borrowers should have their loan calculation amounts handy and ready to go as a result to quickly answer these questions. Having access to other payroll journals and bank statements electronically while going through the process can also be helpful. Each bank has their own requests, but the above are the most common.
While purely anecdotal, we have yet to speak to any client or contact that has received funding. There are reports of bottlenecks internally with banks only having so much access to the SBA ETRAN system (where the loans are submitted) and even those with access saying the site and platform are crashing.
More funding for the program
Once the Treasury confirmed these loans were “First Come-First Serve” many felt a rush to apply immediately as to make sure they got the needed relief. On April 7th it was reported and tweeted that the senate is expected to take a voice vote on April 9, 2020 to allocate between an additional $200 – 250 Billion to the program, allowing it to continue longer. This is much needed funding and should ease the pressure of that many companies are feeling about missing out. After the Senate voice vote, which is expected to be unanimous, it will go to the House. When the original CARES Act was passed, one representative requested a full vote requiring members to return to Washington. There exists the possibility of this happening again, however, it may delay the additional funding. Any delay should be watched, but it should not impact borrowers materially.
Federal Reserve to Provide Liquidity on these loans
One major bottleneck that has likely fueled some of the delay of banks had to do with a secondary market for these loans. If banks were required to hold the loans for a long period of time, they would theoretically run out of available capital to make these loans, limiting access. However, the Federal Reserve indicated they will open a facility to purchase these loans, thereby returning cash to banks and allowing them to originate more PPP loans.
We are still awaiting regulations on the Treasury Exchange Stabilization Fund loans for Mid or Large size organizations that have more than 500 employees. We also have more guidance from the IRS on the Employer Retention Tax Credit (A potential alternative to PPP loans) and on advance funding on FFCRA covered leave. We will be providing updates on these programs over the next few days. Please stay tuned.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.