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SBA Releases Guidance on Certification of the Necessity of a PPP Loan

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The Small Business Administration (SBA) today released the promised guidance regarding the good faith certification of the necessity of a Paycheck Protection Program (PPP) loan in new FAQ 46. As a reminder, the certification in the loan application states, “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

This new guidance is a mix of good news and less good news.

Loans Under $2 Million

First, the SBA has now stated that “[a]ny borrower that, together with its affiliates, received [a] PPP [loan] with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

In other words, borrowers who received less than $2 million will not be required to substantiate the necessity of their loan.

Loans Over $2 Million

However, borrowers who received more than $2 million can still qualify for the loan by substantiating “an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.”

We have been counseling clients to ensure they have documented the facts and circumstances as they existed at the time they made their application to create a record substantiating their need for PPP loan funds. This new SBA guidance continues to validate that recommendation.

Additionally, FAQ 46 addresses what will happen if the SBA’s review of your certification finds that you “lacked an adequate basis for the required certification concerning the necessity of the loan request.”

The two key points are:

  1. If your organization is found to not have needed the PPP loan funds, you will be asked to repay the funds immediately and there will be no opportunity for forgiveness; and
  2. If you do repay the funds when asked to do so, the “SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”

This second point means that if you repay the loan funds if asked, the SBA will not seek other remedies, including civil or criminal sanctions.

Any new guidance found in FAQ 46 regarding evaluating your organization’s need for its PPP loan funds must be read between the lines in the FAQ’s explanation of the rationale for creating a safe harbor for organizations borrowing less than $2 million. In justifying this bright line, the SBA states that:

  • Organizations borrowing less than $2 million “are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.”
  • Setting the safe harbor threshold at $2 million “will… promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.”

In essence, this says that documenting your access or lack of access to alternative sources of liquidity remains important, keeping in mind the requirement of FAQ 31 that your “ability to access other sources of liquidity” should not require you to do so “in a manner that is…. significantly detrimental to the business.”

Note that nothing in FAQs 31 and 46 negates the uncertainty element in the certification. Thus your documentation should not only take into account your access to liquidity but also take into account:

  • General economic conditions and the uncertainty created by those conditions;
  • The impact of COVID-19 and government stay-at-home orders on your sector of the economy and geographic region;
  • The impact of such orders and their disruptive impact on your business operations in their entirety;
  • The impact of uncertainty, government stay-home-orders, unemployment, and other similar factors on your revenues and operations; and
  • Any other factors relevant to your particular organization.

Review our article on this topic, PPP Loan Good Faith Certification: Now What? for additional information.

Unfortunately, the guidance does not address the impact of unrestricted cash reserves on the liquidity analysis. Accordingly, your organization should factor in the availability of such reserves in documenting your need and the degree of detriment to your organization the use of such reserves will create.

Please contact us online or at info@capincrouse.com with any questions.

2 Comments

  • Two Questions
    1. When you segment the headings of “Loans Under 2 million”
    and “Loans Over 2 million” how many paragraphs refer to “Loans Over 2 Million”. In other words, does the paragraph that starts with “Additionally, FAQ 46 addresses…” refer to both classifications or only to “Loans Over 2 Million”?

    2. I’m somewhat confused about this “Safe Harbor” exclusion. I thought Safe Harbor referred to the fact that if we feel we don’t meet the “need” test we can return our loan within a certain amount of time and not be liable for abusing the “need” issue.

    Many thanks for your open communication regarding PPP. It has been very helpful!

    • Ted Batson Ted Batson says:

      David,

      Everything after the heading “Loans over $2 million” applies to such loans, not just that first paragraph.

      Second, there are in essence two safe harbors at work here. First, if your loan is less than $2 million (the safe harbor amount), you are deemed to have satisfied the necessity requirement. You need do nothing more, nor do you need to read the rest of the alert. If your loan is over $2 million there is a “safe harbor date” that applies to your decision to keep the funds or return them. That safe harbor date is now Monday, May 18, 2020. If the original principal amount of your loan was more than $2 million and you choose to return the funds by May 18, then you will be deemed to have acted in good faith and your loan application will not be subject to review.

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