PPP Loan Program: Am I in Trouble? What the New Certification Guidance Means for You *********Update 5/06/2020*********
Information regarding PPP loans are constantly changing. New updates are highlighted in red.
Last week, an additional $310 billion in funding was approved for the Paycheck Protection Program. Given that the initial $349 billion was used within weeks, it’s likely the second tranche will go quickly as well.
Meanwhile, though SBA updates its Frequently Asked Questions nearly daily and periodically releases additional interim rules, we still await more detailed guidance on loan forgiveness.
A few recent updates to the FAQ about the borrower certification has drawn a lot of attention:
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 14, 2020*. will be deemed by SBA to have made the required certification in good faith.”
Then, a few days later, with #37, SBA stated that businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations are also covered by the guidance in #31.
And then the next day came #39:
39. Question: Will SBA review individual PPP loan files?
Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1.
Why did we get this new guidance?
Well, you might think of this as the “Ruth’s Chris” rule. When the initial tranche of loan funds ran out, many small businesses were left on the outside looking in. That frustration led to anger once stories broke about the large loans received by Ruth’s Chris Steak House and other publicly traded companies. In response to the backlash, Ruth’s Chris and many other companies returned their loan funds and SBA added this additional guidance about the borrower certification on the loan application.
While this guidance is given to all borrowers it’s written with a fairly narrow target audience in mind: big companies, both public and private, with other options, and particularly those taking large loan amounts. You know those emails that go out to the whole office about not burning popcorn in the microwave when it’s just one person who does it? It’s kind of like that. If you’re not the monster who assaults your colleagues’ olfactory senses, it’s not really directed at you.
What does it mean?
I’ve had several clients ask me what to make of this new guidance. What does it mean for the loan request to be necessary? Must you be at the point where you’d be forced to close your doors tomorrow to qualify for a loan? Does this mean that a borrower who reasonably believed their business would be impacted by the pandemic, took a loan, and then doesn’t suffer the business impact they feared is now in trouble?
I don’t believe that this new guidance is intended to suggest that SBA is going to second-guess a small business who applied in good faith but whose business conditions look better today than when they applied, or that businesses must be at the brink of ruin to be eligible. Rather, it’s intended to remind potential borrowers that this is a taxpayer-funded program of limited resources intended to help businesses in need. PPP isn’t meant to support big companies with ample funding options but rather a lifeline for businesses that might otherwise be seriously impacted by COVID-19.
The key sentences in the FAQ are here:
“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.”
Let’s look at that certification language again, this time broken out into subparts:
Borrowers must [certify] that current economic uncertainty makes this loan request necessary to support [ongoing operations]
- 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.
So, you might think of this certification as a two-pronged “good faith” test. The first prong refers to current business activity; that is, how is the borrower’s business as of the date of application? Has business declined compared to a typical month? Has the business had to lay off employees or reduce hours? Is it reasonably likely that the decline may continue? A business that, as of date of application, has seen a decrease in sales and/or had to reduce staff can likely meet that prong of the good faith test.
The second prong mentions the ability to access other sources of liquidity in a manner not significantly detrimental to the business’s ongoing operations. What does that mean? Notably, while other SBA loans apply a Credit Elsewhere test, PPP does not.
But, going back to the Ruth’s Chris example, if your business is sitting on piles of cash or has ready access to capital on favorable terms, it may be hard to show the good faith needed for a PPP loan. If, however, your only other options are to burn through your limited capital reserves or to take a loan elsewhere on unduly onerous terms, you can likely meet this second prong. After all, supporting ongoing operations means taking prudent steps today that will enable your business to ride out the crisis and remain in operation once this is over.
If you are still unsure if your application is in good faith, consider this: Imagine the local paper ran a story announcing you’d gotten an SBA loan. What would your reaction be? Would you be worried about a PR disaster, or proud to share that you’re doing all you can to keep your business going and your employees paid?
What should you do?
This new guidance reminds borrowers to keep good documentation not only of how loan proceeds are used but also of the circumstances that gave rise to the loan request in the first place. My advice to SBA borrower clients is to gather such documentation so that if the need arises to explain why you applied, you’re not relying on your memory to recreate the record after time has passed.
For example, records showing that your business activity had declined significantly, or that you’d had to lay off employees, or been declined for credit elsewhere, would be strong evidence that the application was made in good faith. In other words, I think it’s important for borrowers to have evidence that they carefully considered their options.
While SBA has expressly stated it will review loans over $2 million, borrowers of any amount should be prepared to provide documentation. In general, I believe, the larger the loan amount and/or the borrowing company, the more likely it is to be reviewed.
Should my business give back its loan funds in light of this guidance?
The FAQ offers a “safe harbor” to borrowers who return their loan funds by May 14. If you give the loan back right away, SBA will deem you to be in compliance, no questions asked. This has led some borrowers to wonder if they should pay their loans back now out of an abundance of caution.
For some eligible borrowers, it may be worth the peace of mind to repay now, and those with loans of $2 million or more should evaluate this option knowing that their loans will be reviewed if they keep them. But if you’re a small business owner who applied in good faith and have the appropriate documentation, this warning is not directed at you. And, these warnings do not mean that a business which received a large loan should automatically give it back, only that you should carefully consider your options.
If you’re a bigger business, public or private, with ample reserves or credit options, though, this certification should make you think twice about applying or prompt you to consider returning loan funds you’ve already received. Those are the proverbial popcorn-burners that the all-office email is meant for.
After all, the guidance says, “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.” To me, that’s a pretty clear warning that if you’re nominally an eligible borrower but don’t need the loan, you should think carefully about proceeding.
No one wants to be the popcorn-burner.
*The repayment date has been extended from May 7, 2020 to May 14, 2020.
For more information regarding SBA loans and the PPP program, please visit: https://fghwlaw.com/covid-19-sba-loan-update-04-15-2020/
Ellen Williamson is of counsel at Farrow-Gillespie Heath Witter LLP. She has more than fifteen years of experience as an attorney, and has practiced probate, estate planning, and guardianship law since 2013. She spent much of her early career with the Small Business Administration Office of Disaster Assistance as liaison with federal law enforcement in the investigation and prosecution of disaster loan fraud. She earned a J.D. from SMU Dedman School of Law.