“Paycheck Protection” Loans: SBA Issues More Guidance on the “Necessity” Certification

Small businesses received additional guidance from the U.S. Small Business Administration (“SBA”) on the new Paycheck Protection Program (“PPP”), which currently makes available low-interest and, in some cases, forgivable loans to businesses that employ fewer than 500 people (generally). The guidance came in the form of an updated “Frequently Asked Questions (FAQ)” document, dated May 13, which can be found in its entirety here.

PPP loans are meant to encourage small businesses to keep their workers employed through the COVID-19 crisis. Find our prior alerts about the program here. The new FAQ will provide some welcome information to borrowers uncertain about whether to keep or repay their PPP loans.

The “Necessary” Certification. Businesses that apply for PPP loans are required to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the applicant’s business. Initially, both lenders and applicants struggled to interpret this requirement. Many borrowers experiencing distress that could greatly benefit from additional funding were not sure if a PPP loan would be viewed as truly “necessary” in the eyes of the SBA.

Prior Guidance. The SBA had previously tried to clarify the meaning of the “Necessary” Certification in guidance released in late April and early May (FAQ #31, FAQ #37, and FAQ #45). The SBA indicated that to make this certification in good faith, both public and private companies must consider whether they have access to sources of liquidity "sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

The guidance notes that public companies with substantial market value and access to capital markets probably could not make the certification in good faith, and that such public companies should be prepared to demonstrate to the SBA the basis for such certification. The prior guidance also indicated that any borrower that applied for a PPP loan prior to the issuance of the new guidance and repays the loan in full by May 14, 2020, will be deemed by the SBA to have made the required certification in good faith.

Despite the guidance, many businesses remained uncertain regarding the “Necessary” Certification. For example, businesses with cash on the balance sheet or the ability to draw on a revolving line of credit were uncertain as to whether they were required to fully draw down this liquidity before borrowing under to the PPP loan program.

New Guidance. On May 13, the SBA issued additional guidance in the form of FAQ #46, which is reproduced in its entirety below, and FAQ #47. As set forth below, any borrower that, together with its affiliates, received PPP loans 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.

For loans in excess of $2 million, the FAQ states that if the SBA determines that a borrower lacked an adequate basis to make the “Necessary” Certification, the SBA’s course of action would be to seek repayment of the outstanding loan balance and deny eligibility for loan forgiveness. If the borrower repays, the FAQ seems to suggest that the SBA’s inquiry into the certification ends.

Prior guidance indicated that any borrower that repays its PPP loan in full by May 14, 2020, will be deemed by SBA to have made the “Necessary” Certification in good faith. In FAQ #47, the SBA extended the repayment date for this safe harbor to May 18, 2020, to give borrowers an opportunity to review and consider FAQ #46.

FAQ # 46: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans 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.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have 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. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning the necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

Additional Information. The complete text of the CARES Act is here and the PPP Enhancement Act is here.

For more information, please contact your Quarles & Brady attorney or:

• Melissa McCord: (414) 277-3079 / melissa.mccord@quarles.com