By this point, eligible small-business clients have likely already received and spent their Paycheck Protection Program (PPP) loans. Now that the funds have been spent, most are turning their attention toward the Small Business Administration (SBA) forgiveness process — and many don't like what they see.
SBA guidance on loan forgiveness has been spotty, and many important rules (and rule changes) were provided only after the fact, creating a huge risk for many business owners who were counting on both the loans and loan forgiveness to help them get by. The fact that the SBA has six years to challenge a business' right to forgiveness makes the situation even more unstable for many.
Insurance companies haven't overlooked this risk. A newly emerging class of PPP loan insurance could provide the solution for small-business clients looking for ways to mitigate their potential exposure down the line — but advisors need to pay close attention to this extremely new coverage option to make sure clients know what they're getting into.
PPP Loan Qualification & Forgiveness: The Risk Factors
As mentioned, the SBA has a six-year period to challenge PPP loan eligibility. The SBA could launch an audit during the loan term, or as far out as six years after the loan had been forgiven. For many business owners, six years of financial insecurity would hinder their ability to grow and enter into valuable transactions with confidence.
Related: PPP Loan Recipients Are Lawyering Up
To qualify for PPP loan assistance, small-business clients were required to provide certain certifications at the outset. At the time of the loan, the business owner was required to certify that current economic uncertainty made the loan request necessary to support the ongoing operations of the business (i.e., that the loan was "necessary").
The SBA also required borrowers to consider alternative sources of liquidity before applying for the loan. They were required to consider sources that would have been sufficient to support ongoing operations without being significantly detrimental to the business. The terms of this requirement arguably remain vague to this day.
Loans were only technically available to business owners with 500 or fewer employees. However, complex rules regarding affiliated parties created confusion for many — and the SBA only provided its interpretation of the requirement after many businesses had already completed their loan applications.
Misrepresentations in the application process — even if unintentional — could result in imposition of both fines and treble damages. Unfortunately, the SBA guidance has been released in stages over time, and we don't know much about plans for audits or enforcement of the guidance received to date. This creates a very real risk that the rules will be interpreted unfavorably for business owners in the future.
PPP Loan Insurance Basics
PPP loan insurance is a completely new product that will likely develop more fully in the coming months. In general, insurance coverage would kick in if the SBA successfully challenged the small-business client's right to receive the loan and later required repayment. Insurance coverage does not currently seem to be available to cover general situations where the SBA rejects the loan forgiveness application — unless the business owner was deemed ineligible for the loan from the start.
