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Future Implications for PPP and Main Street Lending Borrowers


What happens if your company is a PPP or Main Street borrower and is contemplating a sale of the company while the loan is outstanding? Much has been written about the basis for applying for the loans, but Pillsbury partners Matt Swartz and Joel Simon dig deeper on Episode 6 of Pillsbury’s Industry Insights podcast to look at the practical implications down the road for borrowers who may be sold in a M&A transaction prior to the loan’s maturity or forgiveness.

Three key takeaways from Matt and Joel’s discussion are:

1. A PPP loan is still a loan.

A PPP loan is a note and loan agreement with a bank just like any other loan. A PPP loan includes covenants, and there will likely be a covenant against the sale of the company or a change in control transaction without the bank’s consent. A violation of the covenant creates a default, so the borrower must get the bank’s consent prior to the sale. If the bank refuses to waive the covenant, the borrower must pay back the PPP loan prior to the sale and the loan will not be eligible for later forgiveness.

2. Good contracts make good partners.

PPP loans are regulated loans which have detailed restrictions on use for the entire period of the loan. It is on the borrower, who certified the loan obligation, to ensure that the restrictions are still being followed after the sale. The big mistake to avoid is not discussing the specifics of the PPP loan during M&A negotiations. It is the borrower’s responsibility to make sure the deal documents specify exactly how the post-acquisition company will use the cash to ensure the restrictions are still being followed. Both sides will also have to negotiate how PPP funds are dealt with in Working Capital calculations, whether it will be treated the same as other capital even though it has restrictions on its use and cannot be distributed out of the company. We are in an unprecedented situation and there will be new terms and agreements that will be negotiated that are not customary or “market” in the M&A space, but it is of the utmost importance that the borrower take careful account of how the PPP loan proceeds are used, how the cash is treated and that everything is well documented.

3. Main Street loans need to be repaid first.

Loans made under the Main Street Loan Program need to be repaid prior to the repayment of any other loans. The Main Street loans will have lower interest rates than typical bank loans. This is unfortunate for sellers who would like to pay off high interest loans before paying off lower interest loans. Furthermore, the Main Street borrower will not be able to offer the advantageous low-interest rate loan to a potential buyer in an otherwise cash-free, debt-free transaction because of the requirement that the Main Street loan must be repaid first.