SBA Issues PPP Loan FAQ Which Narrows Certification Criteria for Small Businesses

By Jason Shultz, CPA, Assurance Partner, HoganTaylor LLP and Leah McLain, CPA, Advisory Practice Consulting Manager, HoganTaylor LLP

Background

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act which established the Paycheck Protection Program (PPP), a loan program intended to provide loans to small businesses impacted by COVID-19.

On Friday, April 17, 2020, HoganTaylor hosted a webinar entitled “Maximizing Forgiveness – A Panel Discussion on Loan Forgiveness and Payroll Protection Program Loans.” In the webinar, Jason Shultz, HoganTaylor Partner of Innovation, addressed the borrower certifications for PPP loan applicants (see the 28:50 minute mark in the webinar and pages 23-30 of the slide deck). This document should be read in conjunction with the information provided in this portion of our webinar.

On Thursday, April 23, 2020, the U.S. Small Business Administration (SBA) published an additional FAQ #31 addressing one of the PPP loan certifications that narrows the certification criteria for small businesses participating in the PPP loan program:

“31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan? Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations 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. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”

We interpret this additional guidance as a significant narrowing of the criteria of what makes a PPP loan “necessary” for a small business participating in the PPP loan program.

We have broken the FAQ #31 down into six sections and have provided our commentary as follows.

Note, emphasis in the FAQ added by HoganTaylor.

Section 1)

“In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations 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.”

PPP borrowers must certify in good faith that their PPP loan is “necessary.” This requirement is unchanged.

The CARES Act suspends the requirement normally present SBA 7(a) loan applications that borrowers be unable to obtain “credit elsewhere”. FAQ #31 implies this requirement may in fact still apply in certain circumstances. This section sets the overall tone for the remaining sections.

Section 2)

“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.”

In our webinar, we addressed this certification and highlighted that it was not defined with a bright line, leaving the interpretation broad and largely subjective.

FAQ #31 is still subjective but does set a tone of a narrower interpretation of whether or not a PPP loan is “necessary.”

Previously, we recommended that borrowers should create a “living document” outlining the facts and circumstances the borrower relied upon to make this certification at the time of application.

This narrower interpretation increases the emphasis on creating and maintaining this document.

Section 3)

“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.”

As a result of the subjective terms included above we believe the following questions are applicable:

1. What is the borrower’s “current business activity”?
2. What was considered as an “other source of liquidity,” and how was a determination made of whether or not it was sufficient?
3. How did the borrower determine what is considered “significantly detrimental” to the business?

It is not clear why the CARES Act suspended the SBA’s requirement that borrowers be unable to obtain “credit elsewhere” if “other sources of liquidity” must be considered in certifying that a PPP loan is necessary. However, these are points the borrower must consider and document in their analysis of the necessity of the loan.

We recommend borrowers address these issues now that this guidance is available based on their best interpretation of these new terms. Consider adding to the previous documentation and not replacing it. As information continues to unfold, date each update. A contemporaneous record of your evaluation of the condition of your business at the time of application against the evolving PPP guidance will be critical if asked for clarification.

Section 4)

“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.”

We presume this section is in response to news media coverage of publicly traded companies who received large PPP loans. Those companies may have met the requirements of the CARES Act prior to the new SBA guidance issued on April 23rd (notably, Shake Shack, who has opted to return its PPP loan proceeds).

Consistent with the guidance we provided in our April 17th webinar and now further reinforced by the tone of this section of FAQ #31, we recommend all companies, not just publicly traded companies, be prepared to demonstrate the basis for their certification their PPP loan was “necessary”.

Like the other sections, this section raises more questions: how will these new terms be applied to non-publicly traded companies?

“Substantial market value” – could this include a private company that is “well capitalized?”

“Access to capital markets” – could this be “access to additional credit lines?"

Section 5)

“Lenders may rely on a borrower’s certification regarding the necessity of the loan request.”

As noted in our webinar, the burden of proof to support the certifications is on the borrower, not the lender. Recall the hold harmless clause included in the CARES Act and referenced in the webinar.

Section 6)

"Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.”

In light of FAQ #31, we recommend all PPP loan recipients reassess whether or not they met the certification requirements in good faith at the time of the loan application. This section puts a deadline of May 7, 2020 on doing so and on taking steps to return the funds if the certification cannot be met.

If this additional information clarifies that your business should not have borrowed the money, we recommend you repay the loan by the May 7, 2020 deadline.

Likewise, we believe FAQ #31 has possibly introduced additional uncertainty for some borrowers. Specifically, as to how the SBA may evaluate loan applications in retrospect. It is prudent to assess this risk as you would other business risk and act accordingly.

Whether you are comfortable with the certifications in light of FAQ #31 or you determine it is appropriate for you to repay the loan, we recommend you document your rationale.

Parting Thoughts

There continues to be a significant amount of uncertainty, related to both the ongoing economic uncertainty of COVID-19 and specifically how the PPP loan program will ultimately unfold.

• We expect the SBA to issue its final rules on PPP loan forgiveness soon.
• FAQ #31 set the tone for future oversight, and that tone is one of narrower interpretations and a higher degree of scrutiny.
• It is imperative that all actions taken are in good faith and supportable. Update your documentation as new guidance is issued.

HoganTaylor will continue to provide updates as information becomes available.