What happens when a PPP recipient goes belly-up?
The U.S. Treasury Department and Small Business Administration’s Payroll Protection Program was designed to serve as a life preserver for employees and business owners reeling from the COVID-19 pandemic.
While there’s evidence to suggest that the program is working for some businesses — 172,786 jobs were directly retained as a result of PPP, the government reported this week — it is by no means a silver bullet. There are firm’s that have gone under despite receiving PPP dollars.
So what happens where a company folds after getting its hands on PPP money? The answer, due in part to the fact that the program was hastily crafted in response to an unprecedented and rapidly evolving economic emergency, often appears to be a combination of “Well, it depends” and “We’re just not really sure yet.”
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“Business owners are making decisions without having all of the information” about how the program works in the long term, Boulder Small Business Development Center executive director Sharon King said. SBDCs serve as conduits between local businesses and the U.S. Small Business Administration. “But what we want to do is give them as much information as possible and talk through the things we don’t know yet.”
There are, however, a few things we know for sure.
First, if the PPP recipient spent the money quickly — within eight weeks for early applicants or 24 weeks for those who received an extension after the Paycheck Protection Program Flexibility Act was adopted in June — and appropriately, they’re in the clear. The loans, so long as 60% is spent on payroll, eventually convert into grants that are completely forgivable.
“The first step for anyone who has a PPP loan and is going to go out of business is to apply for forgiveness of that loan,” Brian Ormsby, founder of government accounting compliance consultancy Pantheon Solutions LLC, said. Ormsby is working with the Boulder SBDC in advising small businesses on PPP.
The hospitality industry, which has dealt with forced closures followed by strict capacity restrictions, is particularly vulnerable. For example, The Mediterranean Inc., parent company of upscale Boulder eatery trio The Med, Brasserie Ten Ten and Via Perla, received a PPP loan worth $1 million to $2 million but shuttered in June.
“Not everyone is going to make it,” Paul Mueller, an accountant and partner with Loveland’s Mueller Pye & Associates CPA LLC, said. “These loans are just not enough to make sure everyone gets through.”
Because PPP recipients can get up to 24 weeks to spend the loan money, it is possible for restaurants to temporarily shut down and wait out capacity restrictions.
“If you want to shut your doors and reopen before the 24-week period is over, you’re more than welcome to do that,” Ormsby said. “That’s potentially an intelligent business decision.”
Businesses that received PPP loans of $25,000 or less are in better shape if they fold than large loan recipients because those small loans do not require collateral.
“They may have taken PPP money, received a certain amount of forgiveness, then closed their doors but not gone bankrupt,” King said. “They could simply pay it off.”
Companies that can’t pay off unused PPP dollars may be best-served by seeking bankruptcy protection. Most or all the loan is likely to be discharged as part of the process as long as the borrower has acted in good faith, experts say.
But there are some aspects of the bankruptcy process for PPP recipients that remain a bit murky.
“We don’t have clear guidance,” King said, as to whether the government would have to get in line with all of a bankrupt business’ other unsecured creditors in order to be repaid.
Experts note that just because a company receives PPP funding before going out of business does not mean that the owner did something unethical or fraudulent with the money.
“A lot of folks applied for PPP funding in good faith, but it took so long for the money to come in that it was too late to save them,” Ormsby said.
King said the SBA “wants things to be done honorably,” but she recognizes that desperate times combined with confusion over PPP guidelines could lead to misuse of funding.
“The problem with PPP that I’ve seen is that people get the money and then say, ‘Well, what can I use this for?’” Ormsby said. “That’s not the question they should be asking, because when you get PPP there’s really only one thing you can use it for: payroll and the roof over [your business’] head.”
According to Mueller, “in a situation where an owner misuses the money, went out of business and is unable to repay the loan, there’s a provision that allows the government to follow the money.”
But he questions whether the government will have the manpower or appetite to investigate every PPP recipient that is unable to repay the loan.
“I’ve got to believe that the SBA just flat doesn’t have enough people to go after the smaller loans” granted to business owners who have shuttered operations, he said. “Is it really to anybody’s benefit to be pursuing these people? I don’t think so.”
Mueller added: “The Treasury has announced their intent to audit all loans above $2 million, but we’ll see if they actually do that. It may be more sabre rattling than anything else. So what happens to loans under $2 million? Well, if you’re reading the tea leaves, Treasury has kind of shown their hand that they don’t really care too much about people who borrowed less than $2 million.”
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