Many businesses have joined the scramble that has taken place during the last weeks to secure a Paycheck Protection Program (PPP) loan. In many cases, such a loan will be key to being able to pay the wages and salaries of staff and certain other expenses during a period when cash flow may have been severely impacted by the shutdown of operations mandated in most states. The lucky companies that were able to secure a PPP loan will be congratulating themselves this week and in the weeks to come as the loan proceeds hit their bank accounts and they are able to meet payroll and keep their enterprises functioning.
However, there may be some unintended consequences of that success. Most businesses have focused on the fact that the PPP loans they receive are forgivable. Provided that the borrower complies with the criteria applicable to the PPP loan, the PPP loan will be forgiven and discharged, in whole or in part. However, until forgiven, and to the extent not forgiven, the PPP loan is a real loan that must be reflected as a true obligation on the books and records of the borrower. Many of the businesses that have secured PPP loans will be parties to existing credit arrangements. In the rush to secure that vital funding, the borrower may not have performed a complete review of its loan documents. Companies are well advised to review the terms of existing credit arrangements to determine whether receipt of the PPP loan will have any unintended but adverse consequences. The applicability of any of the following examples will depend on the exact wording of a borrower’s documents. Those can vary considerably depending on the type of loan, whether it is secured or unsecured, and the presence of industry-specific provisions.
We are not seeking to turn the success of securing a PPP loan into a reason for concern, but wish to highlight for borrowers the fact that a detailed analysis of existing loan documents may not have been performed in the rush to secure vital funding. It would be a shame for any borrower lucky enough to have secured such financing to discover that its success has triggered a cash sweep provision under an existing credit agreement, or another provision that may affect operations. Borrowers would do well to be proactive in identifying any issues and resolving them with their lenders before they ripen into more serious problems, and while lenders remain under federal directive to work with borrowers adversely affected by COVID-19.
Please note: This alert contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.
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