Too Soon to be Seeking Safe Harbor for the PPP
By Phil Villegas
Last week the SBA (Small Business Administration) provided supplemental guidance as it relates to the PPP (Paycheck Protection Program) that aimed at correcting what was considered abuse of the program by some large and publicly traded corporations. Companies like AutoNation and Ruth’s Chris Steakhouse came under scrutiny for taking millions in funds in light of having access to other capital and credit facilities while many small business owners were shutout of funds as the initial PPP funding quickly became depleted. The new guidance was aimed to provide borrowers time to further consider the certification statement that was required by the PPP as the loan being “necessary” to support ongoing operations by providing an avenue to return these funds. PPP fund borrowers were provided until May 7, 2020 to return the funds under a Safe Harbor provision without penalty or fear of potential criminal investigation and civil proceedings under the False Claims Act.
Since this supplemental guidance was issued, we have had multiple calls with concerned dealers on how to interpret this guidance and whether the funds should be returned to avoid any possible criminal or civil legal issues. Some dealers that took the PPP funds have the following concerns in their interpretation of what might be deemed “necessary” to support ongoing operations which are:
· We are well capitalized and have deep cash reserves.
· Our sales have not been significantly impacted.
· We have untapped lines of credit.
While each dealer has to assess their individual circumstances, our position with dealers is to retain the PPP funds despite the current impact to their capital or revenues. The reality is that even if your individual dealership has not been significantly impacted as of yet, it is entirely too early to fully determine the full extent of the financial impact to come. There is not a single dealer in the country as of May 7, 2020 that can fully certify they are or will be immune to any future impact of Covid-19 regardless of how the last 6-7 weeks has impacted them.
If there is one lesson the reverberates from this Covid-19 experience is that our worlds can be turned upside down very quickly and unexpectedly. With no vaccine likely available for at least six or more months from now, every dealership is subject to potential outbreak that could cause the dealership to temporarily shut down.
In addition to the risk of a possible outbreak, there is still significant uncertainly what the next few months have in store, particularly since many manufacturers still have plants shut-down. For many dealers, their supply chain may not return to normal for 90-120 days, which can lead to added losses. Coupled with this is the significant devaluation of many dealers’ pre-owned inventories and the deferred losses they are likely to realize in months to come.
Based on the past, current and evolving market environment, I’m fully confident that privately owned dealers will be able to defend their certification as “necessary” under the PPP even if in the end it is determined they did not “need” the funds. The changes dealers have had to experience over the last seven weeks, and likely continue in the months to come, cannot be approached in good conscience without as much cash reserves as possible.
While sailors will often look for safe harbor in the midst of a storm, the opposite applies here in that we are still very much in the middle of a storm and taking the safe harbor route might threaten your dealership more than the alternative without funds that still may be needed.