At this point, eligible small business clients have likely already received and spent their Paycheck Protection Program (P3) loans. Now that the funds have been spent, most are turning their attention to the Small Business Administration (SBA) forgiveness process – and many don’t like what they see.

SBA guidelines on loan forgiveness have been patchy, and many important rules (and rule changes) were only provided after the fact, creating huge risk for many business owners who both mattered on loans and loan forgiveness to help them get by. The fact that the SBA has six years to challenge a company’s right to pardon makes the situation even more volatile for many.

Insurance companies have not neglected this risk. An emerging new category of PPP loan insurance could provide the solution to small business clients looking for ways to mitigate their potential exposure down the line – but advisers should pay close attention to this brand new coverage option for their clients. ‘make sure customers know what they’re getting into.

Qualification and delivery of PPP loans: risk factors

As mentioned, the SBA has a six-year period to contest eligibility for PPP loans. The SBA could initiate an audit during the life of the loan, or up to six years after the loan is canceled. For many business owners, six years of financial insecurity would hamper their ability to grow and enter into valuable transactions with confidence.

Related: PPP loan recipients advocate for

To qualify for PPP loan assistance, small business clients had to provide certain certifications at the outset. At the time of the loan, the business owner had to certify that the current economic uncertainty made the loan request necessary to support the day-to-day operations of the business (i.e. the loan was “necessary”) .

The SBA also asked borrowers to consider other sources of cash before applying for the loan. They were required to consider sources that would have been sufficient to support ongoing operations without significantly harming the business. The terms of this requirement are undoubtedly vague to this day.

The loans were technically only available to business owners with 500 or fewer employees. However, complex rules regarding affiliate parties created confusion for many – and the SBA only provided its interpretation of the requirement after many companies had already completed their loan applications.

Misrepresentation in the application process – even if unintentional – could result in the imposition of fines and triple damages. Unfortunately, the SBA guidelines have been issued in stages over time, and little is known about the audit plans or the application of the guidelines received to date. This creates a very real risk that the rules will be interpreted unfavorably for business owners in the future.

Basics of PPP Loan Insurance

PPP loan insurance is a brand new product that is expected to develop further in the coming months. Generally, insurance coverage would come into effect if the SBA successfully challenged the small business client’s right to receive the loan and subsequent required repayment. Insurance coverage does not currently appear to be available to cover general situations where the SBA rejects the loan forgiveness request – unless the business owner was found to be ineligible for the loan from the start.


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