PPP Loan Maturities and the Surety Perspective
December 7, 2020 | By Drew Addison
We’ve reached the point of the loan life cycle of the Paycheck Protection Program (PPP) where current maturities of the long term debt are hitting the balance sheets for construction companies all over the United States. If the awarded contractors followed all of the continuously-changing guidelines and processes for forgiveness, most underwriters would agree that a majority should be forgiven. The problem we now face is timing.
Working Capital Bottom Line
As of a week or so from November 24th, the Small Business Association began reviewing forgiveness applications. This could cause a delay in forgiveness, potentially creating some additional hurdles for contractors that may be strapped for working capital. Since working capital floats bonding capacity, it is becoming more of an issue and will increasingly be so with every quarterly financial updated leading up to the final decision by the banks. To help navigate some of the changes, I contacted Ryan Rummel, CPA, Assurance Senior Manager at RSM US, LLP in San Antonio, TX.
First order of business is to identify how the current maturities are affecting your working capital calculation. Ryan added, “On the maturity dates for loans, the PPP Flexibility Act, effective June 5th, allows the bank to extend the initial 2-year term to 5 years (i.e. from April 2022 to April 2025 for most loans), but the bank must agree on that extension. For loans that were approved on or after June 5th, the term is automatically 5 years. Some banks have automatically extended all of their loans to 5 years, but most are on a loan to loan basis.” The key here is, the longer the term length, the small the current maturities which ultimately has a smaller effect on your calculated working capital. Ryan added, “Contractors need to contact their banks in order to correctly calculate current/long-term maturities, and to adjust loan term length.”
Ryan also included the Deferral Period verbiage directly from SBA:
- Deferral Period. The Rules confirm that the deferral period for payment of principal and interest is extended from six months to 10 months. If the loan forgiveness application is submitted to the lender within 10 months after the end of the eight-week or 24-week covered period, then the borrower will not have to begin principal and interest payments before the date on which SBA remits the loan forgiveness amount to the lender (or notifies the lender that no loan forgiveness is allowed). The rules provide the following example: “If a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.”
In conclusion, the timing of the funding of your PPP loan in conjunction with the date in which current maturities SHOULD begin does create complication. When calculating your maturities of this loan, request guidance from your banker and your construction CPA to minimize the impact on your working capital.
Surety Agent Communication
After receiving the guidance from your banker and CPA, and once you have a clear understanding on how your PPP loan should be reflected on your balance sheet, the next step is to get your Surety involved as soon as possible. What makes sense to a CPA or banker does not always translate, so the sooner you begin this process prior to 12/31 or your FYE, the better. Your agent should already be engaged in this process with the underwriter, so the communication should be focused on how the loan is presented on your financials. We know the odds of forgiveness are great, but the reality is it is a real loan and hasn’t been forgiven yet. That being said, I’ll try to not put all underwriters in the same basket, but only state my opinion and what my experience has been so far. It should be the responsibility of your surety agent to provide a clear communication on how your underwriter will be considering this debt. Every surety is a little different from the next, but when it comes to liabilities, the common trend is that it is always considered as stated on the financials.
The consideration of this debt from most surety markets, in my experience so far, only shifts slightly. While they are all considering the current maturities as if it is a standard loan, you must ask them if they are considering it a “soft debt”. Upon reading this, most underwriter out there will probably agree that it should be considered as “soft debt” and tell you the same, but be sure to have them or your agent provide detailed clarity on what that means exactly.
Generally, and this is one interpretation (and my preferred method) of how the PPP Loan is considered “soft debt”, is that it be treated as long-term in the underwriters’ analysis, but understand and expect the loan to be forgiven. It has to be recognized, but it could be argued that it will be forgive, or at worst, paid out over a longer term. So, this interpretation would view the PPP Loan debt similar to how they would view company debt owed to a shareholder, as opposed to “hard debt” owed to a bank under a more standard bank loan agreement. The point is, there could be more surety credit available through this interpretation and/or market.
Steps to Consider and Support References
This is not at all a write up to discourage contractors for taking the PPP Loan support. It is a great program, which has helped many businesses stay afloat. This is merely a call for proactive steps to be taken in all aspects of construction financials as it pertains to the program. Most contractors I work with are very active on making sure the processes and documentation is in place for forgiveness, and that is absolutely a primary objective. But with all of the time put into that, we want to shine a light on the surety aspect so the loan works as it is intended. As explained, it can become a hindrance to Working Capital, and ultimately your bonding capacity if not managed.
Here’s what we suggest contractors do now:
- Contact your bank for:
- guidance on correctly calculating your current/long term maturities
- loan term extension from 2 years to 5 years if not already done
- Contact your Construction CPA to:
- confirm your internals are reflecting the maturities properly, and to prepare them for your FYE Statement.
- Ryan Rummel, CPA at RSM US, LLP is a great resource that we suggest you reach out to if you are looking for Construction Accounting specific help.
- Ryan can be contacted at: firstname.lastname@example.org
- Start working with your surety agent now to:
- begin the dialogue with your underwriter so you have a clear understanding of their specific stance on the PPP Loan and how it will affect your working capital.
If you have any questions, or would like perspective on how the loan is affecting your financials and/or surety program, please reach out to Drew Addison directly at email@example.com or 210-697-2226.