What is a PPP loan and do I have one?
A Paycheck Protection Program (PPP) loan is a loan that is backed by the Small Business Association (SBA) to provide economic relief to businesses adversely impacted by COVID-19. If a business owner applied for economic aid under the CARES Act, they probably have a PPP loan. PPP loans are granted through the SBA or through another third-party lender.
I want to raise money. Does this impact my PPP loan?
Potentially.
Prior to any change of control transaction, the PPP borrower must notify their lender in writing of the proposed transaction and provide a copy of all agreements related to the transaction. A change of control transaction means: (1) a sale of at least 20% of the ownership interest of the company, including to any existing stockholders; (2) a sale of at least 50 of the company’s assets; or (3) a merger of the company (either as an acquisition or a conversion into another business entity). In each of these cases, the SBA must be notified about the transaction.
In addition to notifying the SBA, the borrower may also have to get the SBA’s prior consent before taking any money or selling their business. You can find the guidelines here.
If the PPP loan has been repaid or a forgiveness application has been processed and finalized, there is no impact on the business owner’s ability to raise money.
If the PPP loan hasn’t been repaid and a forgiveness application hasn’t been processed yet, the business owner may have to get the SBA to consent to the transaction which could significantly impact the closing date. Below is a chart that summarizes the various scenarios and how SBA consent is impacted. These only deal with SBA consent and a third-party lender may have additional notice or consent requirements in addition to what is outlined here.
I want to sell my business. Does this impact my PPP loan?
A sale of business is considered a change of ownership transaction.
If a business owner is selling all of the equity of their business via a Stock Purchase Agreement, the chart above outlines SBA consent requirements.
If a business owner is selling more than 50% of the company’s assets, the business owner will have to obtain SBA consent unless the forgiveness application has been submitted and an escrow account has been opened with the lender that contains the outstanding amount due under the PPP loan. In addition, there is still a notification requirement with the SBA Loan Servicing Center within 5 business days after the close of the asset sale.
I don’t need SBA consent. Should I be worried about anything else?
Yes.
A third-party lender could have additional consent or notice requirements. The SBA still requires notice within 5 business days after closing of the identity of the new owners of the common stock or ownership interest, the new owner’s ownership percentage, the EIN for any owners holding at least 20% of the company’s equity and the escrow account information, if an escrow account is required.
There are other scenarios that could trigger SBA and/or third-party lender consent and borrowers should speak with their attorney ASAP if the company is planning to raise money or sell with an outstanding PPP loan.
