In the last few weeks, we’ve been reading press reports that both for-profit companies, like the national restaurant chain Ruth’s Chris Steak House and the NBA’s Los Angeles Lakers, and nonprofit institutions applied for—and received—the allocated resources for small businesses under the Paycheck Protection Program (PPP).

It is likely many organizations with fewer than 501 employees quickly filed an application with their banks to ensure their place in line when the funds were first announced to be available. Now that these resources have been allocated and depleted, and further monies will be made available, we need to consider the implications and demands surrounding the compliance of accepting these funds.

Question 31 of the “Paycheck Protection Program Loans Frequently Asked Questions” is:
“Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”

The official answer to that question is that borrowers “must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

We were curious to see what some of our nonprofit colleagues were doing. After speaking with many nonprofits on this matter, we learned:

• Three decided they did not qualify due to their number of employees.
• Three applied, received the resources and have subsequently decided to return the funds.
• Nine applied and decided they should keep it.

What’s the risk in keeping the funds? There are really three risk factors for nonprofits to consider:

1. Your nonprofit should examine their reserves and financial position and ask themselves:

• Do we have access to a meaningful line of credit or other resources?

  If yes, then the nonprofit should take additional steps and analysis to ensure that reserves are for other specific purposes or that the nonprofit still qualifies as a need for ongoing operations prior to acceptance.

  If no, proceed to the next question.

• Has our revenue (and/or net revenue) been reduced by COVID-19?

  If yes, proceed to next question.

  If no, consider additional analysis on whether the nonprofit truly qualifies for funding ongoing operations with PPP money.

• Do we believe we have a good time frame to enable us to recover?

  If yes, consider how much may be needed to recover, and make sure your board signs off on your documentation and analysis.

  If no, begin making plans to use the money, and make long-term decisions that will be necessary to ensure your organization’s sustainability.

Looking at your nonprofit’s unrestricted net assets in comparison to payroll and operational expenses should provide some good direction on the necessity of the funds to help cover costs in a manner that satisfies the “significantly detrimental to the business” question. (Even nonprofits with sizable reserves may still qualify if those reserves have been allocated for purposes other than operational.)

Key takeaway: Your nonprofit should document their reasoning and basis for making the certification.

2. The second thing to consider is reputational risk. For entities like Ruth’s Chris and the Lakers, the negative attention they received in the media may be financially detrimental. The true cost of reputational damage can’t be easily quantified, which is why it is so critical to be prepared—and proactive—when articulating your organization’s need for the funds. Both Ruth’s Chris and the LA Lakers have subsequently returned the money they received.

3. Does accepting government money provide any interference or oversight that could impede the mission of the nonprofit? This question is also likely a board matter in determining the role of the nonprofit and its partnership with the government to accomplish its mission.

Key takeaway: Communication with your board and key donors is vital. If you believe your organization qualifies and warrants the funds offered through PPP, let your leadership and constituency know why, giving them good reason to trust and understand your stewardship of funds received from all sources.

 
By Bob Mims, Sharpe Group CFO, and Tom Grimm, Sharpe Group Senior Consultant
 

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