You may be concerned about recent guidance from the Small Business Administration (“SBA”) regarding your eligibility to access loans under the Paycheck Protection Program (“PPP”). The guidance expands on the requirement that borrowers certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operation of the Applicant.” According to the new guidance:
“[A]ll borrowers must assess their economic need for a PPP loan . . . at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’ Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. 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 SBA has also stated a “safe harbor” for those who now believe their prior certification was in error by specifying that any borrower who applied for a PPP loan on or before April 23, 2020 and who returns the PPP funds by May 14, 2020* “will be deemed by SBA to have made the required certification in good faith.”
In effect, this means that every borrower who applied for a loan on or before April 23, 2020 has until May 14, 2020 to re-evaluate whether, at the time of their application, they were in fact able to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
The SBA has also indicated that audits of the PPP loan program are likely for many borrowers, and are a certainty for any business that received a PPP loan in excess of $2 million.
For PPP borrowers concerned about whether they are able to make the required certification, we offer the following thoughts:
1. The requirement is merely that the certification be made in “good faith.” This standard means that a borrower need not satisfy an objective test of whether the funds are necessary to support ongoing operations, but instead must in good faith believe that to be true. This is an important distinction, particularly given the current fluidity of our economic situation that will likely provide many businesses with a good faith basis to believe that the PPP funds are necessary.
2. The certification must be made at the time of the loan application. Whether the economic challenges that appeared possible at the time of the certification actually materialize is not relevant to the determination.
3. For any borrower, documenting at the time of the application the “good faith” determination that the loans are necessary is key. This requires work now to gather information and explain (in a “memo to file” or the like) why the funds are necessary. Borrowers should not wait until they are audited to construct this rationale retrospectively.
4. A key factor in the determination is the business’s access to other sources of capital. The SBA has made clear that merely having access to other capital (such as a line of credit) is not disqualifying. However, the borrower should be prepared to explain why accessing that alternative capital, rather than the PPP loan, would be “significantly detrimental to the business.” For example, exhausting a line of credit to support salaries during the pandemic may preclude other crucial uses of that line of credit in the future (such as supporting operations during a prolonged economic downturn).
5. Documentation of a borrower’s need for the PPP funding may include information regarding the following:
- Financial Stability (including budgets and financial forecasts)
- Liquidity (cash on hand and your access to additional capital)
- Government Mandates (federal and state orders that affect your business)
- Adverse Impacts likely to arise from the pandemic and government orders arising out of the pandemic
- Use of Loan Funds (when and how PPP funds are being used)
- Necessity of Funds (reasons your current funds are insufficient to maintain your business without the PPP loan)
If you have any concern that your certification of economic need is in question, we are able to help you with this assessment. If you need our assistance, please let one of our COVID-19 team members know at your earliest convenience:
*Following our original blog post on May 5, 2020, the Small Business Administration extended the safe harbor deadline related to the Paycheck Protection Program from May 7, 2020 until May 14, 2020. This blog post has been updated accordingly.
No Legal Advice or Attorney-Client Relationship: The materials on this website have been prepared by Webber & Thies, P.C. for informational purposes and are not legal advice. Your use of this website does not create a lawyer-client relationship. You should not act upon this information without seeking advice from a lawyer.
Webber & Thies, P.C. is a full-service law firm based in Champaign-Urbana whose attorneys have been serving Central Illinois for more than 70 years.