A recent update to the Paycheck Protection Program (PPP) FAQ sheet (FAQ #31) may cause issues for businesses that have applied for funding under PPP, and for those that have received funding under PPP.
Specifically, FAQ #31 states that “all borrowers should review carefully the required certification that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant’” by taking “into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operation in a manner that is not significantly detrimental to their business.” If a borrower fails to satisfy the requirements of the certification, pursuant to the updated guidance, the borrower “will be deemed by SBA to have made the required certification in good faith” if they repay the loan in full by May 7, 2020 (“Safe Harbor”).
Below are the details of FAQ #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 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.
The above new information requires that companies that received funding evaluate whether they have the appropriate documentation to support how they meet the above standards. And if they determine that they don’t meet the above standards they should repay the loan by the above May 7th safe harbor date. For those companies that have not received funding that currently have applications pending, they should also access their support for the above standard. And if they determine that they will not meet the standard they should consider withdrawing their applications.
There is a component of FAQ #31 that states “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),” Accordingly, this could be interpreted to mean that companies that have lines of credit that are not fully utilized may be able to not include this fact as a component of their ability to access other sources of liquidity. We anticipate that further guidance will be provided to further clarify FAQ #31, including the above suspension requirement.
In the interim, companies that have received PPP financing or have applications in process should review their individual situations as soon as possible to determine how this recently issued SBA guidance could impact them.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.