SBA Guidance on Borrower Certification for PPP Loans (Updated)

by Andrew D. McCarthy

If your business received a Paycheck Protection Program (PPP) loan, now may be a good time to look at the new guidance from the Small Business Administration (SBA) to see whether the business should consider returning the money if the business did not really “need” it.  If, after considering the guidance, the business determines it does indeed need the loan, the business should ensure it has documentation demonstrating such need.

Background

On April 24, 2020, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act.  This refilled the PPP with $320 billion.  The PPP is a forgivable loan program for “small” businesses.  The Small Business Administration (SBA) administers the PPP.  Earlier in April, a deluge of applications exhausted the PPP’s initial pool of $349 billion.

PPP loan applicants are required to certify that current “economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Civil and criminal penalties attach to such certifications if they are not accurate.  Many PPP loan applicants were therefore concerned about making such “necessity” certification.  The SBA has published PPP Frequently Asked Questions, which it is updating on a regular basis.  FAQ 31 addresses the “necessity” certification.  FAQ 39, following up on public comments by Treasury Secretary Steven Mnuchin, states that the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.”

SBA Guidance

FAQ 31, published on April 23, provides guidance from the SBA regarding the “necessity” certification.

One of the most important things to take away from this guidance is that existing PPP borrowers that made the certification before FAQ 31 became available will be deemed to have made the necessity certification in good faith IF the borrower repays the PPP loan in full by May 18, 2020.*  In other words, if your business borrowed money under the PPP and you now determine in light of the new guidance that the “necessity” certification was questionable, the business can protect itself by paying back the loan before May 18.

How can a borrower determine whether it can make the “necessity” certification in good faith?  FAQ 31 essentially tells borrowers to ask themselves whether, in light of “their current business activity and their ability to access other sources of liquidity,” they can access enough liquidity “to support their ongoing operations in a manner that is not significantly detrimental to the business.”  FAQ 31 says that, for example, “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”  The preceding example does two things: (1) puts public companies on notice that they will be subject to scrutiny (for example, Shake Shack, which said it will return its PPP loan), and (2) highlights that documentation will be important in a borrower’s ability to justify its “necessity” certification.

Conclusion

FAQ 31 raises questions that are difficult for borrowers to answer without further clarification from the SBA or other authorities.  Exactly how much pain would a borrower need to sustain from getting non-PPP funding before it reaches the “significantly detrimental” threshold that justifies a PPP loan?  There is no bright-line or one-size-fits-all answer.

If a PPP borrower did not consider alternative sources of liquidity when submitting their PPP application, the borrower should now do so.  If funding is available from sources other than the PPP in a manner that is not significantly detrimental to the business, the business should consider returning all PPP loan proceeds before May 18 to avoid facing penalties based on an inaccurate “necessity” certification.  If the borrower concludes that the PPP loan was necessary, the borrower should have documentation supporting the business’s reasonable determination that accessing funding from such alternative sources would be significantly detrimental to the business.

Please note

*In FAQ 47, published May 13, 2020, the SBA stated that this deadline was being extended from May 14, 2020 (which was an extension of the original May 7 deadline) to May 18, 2020. The original post of this article contained the May 7 date.