Certification Made in Good Faith. Several weeks ago, the SBA issued a series of FAQ regarding the PPP loan process. FAQ #31 asked whether large companies with adequate sources of liquidity qualified for a PPP loan. The question did not cause concern. It was asked after news reports of Shake Shack, Ruth’s Chris and other large companies quickly gobbling up the first round of PPP loan money.
However, the answer to FAQ #31 caused concerned for all borrowers, even those with small PPP loans. Part of the answer reads: “[A]ll 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. Did this mean that all borrowers were required to independently justify their request for PPP loan funds under current conditions (which, by the way, bars many employers from operating)? Did this mean that small businesses with money in the bank or a line of credit were compelled to use those funds instead of a PPP loan?
Safe Harbor for Loans Under $2 Million. Apparently recognizing the concern caused by its answer to FAQ #31, the SBA amended the FAQ by adding #46. It asks, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”
The SBA implemented a safe harbor provision that deems borrowers who receive a PPP loan in an amount of less than $2 million to have certified the necessity of the loan in good faith. The safe harbor assumes that a borrower of less than $2 million generally does not have access to adequate sources of liquidity like larger companies.
Audit of All Loans Over $2 Million. The SBA reaffirmed that every loan over $2 million will be subject to review for compliance with the certification requirement. As a result, we recommend that borrowers who have obtained a loan in excess of $2 million carefully conduct an internal review of their need for a PPP loan. These borrowers must consider current business activity, including shut-down and stay-at-home orders, and other sources of liquidity. Conduct this audit with legal counsel, maintaining the attorney-client privilege. This will allow business personnel to candidly discuss the company’s condition and prepare the strongest possible justification for certification.
Repayment if Need is Lacking. If the SBA determines a borrower lacked a basis for certification, it will ask for immediate repayment. If repayment is made, the SBA will not pursue enforcement or referrals to other agencies.
The SBA also indicated that a borrower of a loan in excess of $2 million, who has determined it has other sources of liquidity, can return the funds by May 18th without penalty.
You can read the current FAQs here: https://www.sba.gov/sites/default/files/2020-05/Paycheck-Protection-Program-Frequently-Asked-Questions_05%2013%2020_2.pdf