May 14, 2020
Since the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020, over four million American small businesses received funding under the flagship program, the Paycheck Protection Program (“PPP”). As background, the PPP is an extension of the Small Business Administration’s 7(a) loan program that provides funding eligible for 100% forgiveness based on specific conditions. For more information regarding the PPP and forgiveness, visit our COVID-19 Task Force.
Of concern for a number of borrowers under the PPP are statements by the Department of Treasury that the SBA will review borrower certifications concerning the necessity of the loan request due to the uncertainty of current economic conditions. Since that time, the SBA in consultation with the Department of Treasury has issued numerous clarifications of these initial statements.[1] On May 13, 2020, new guidance was published regarding review of and consequences stemming from the certification concerning loan necessity. This update summarizes that guidance and recommends the documentation that may be required to evidence compliance with the certification requirements.
Borrowers of loans under $2 million are deemed to have made the necessity certification in good faith
The SBA has created a “safe harbor” for all borrowers of loans under $2 million. “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.” In other words, if a borrower received a loan under $2 million, that borrower has been “rubber-stamped” by the SBA as having made the necessity certification in good faith. It is significant to note that the $2 million ceiling includes the aggregate of the PPP loan to the borrower plus any PPP loan to the borrower’s affiliates.
Borrowers of loans over $2 million that are found to have not made the necessity certification in good faith must repay the loan
The SBA further clarified that borrowers with loan sizes greater than $2 million may still have an adequate basis for making the good-faith certification based on their individual financial circumstances. Any borrower that the SBA determines did not make the certification in good faith will not be subject to administrative enforcement or referrals to other agencies so long as such borrower repays the outstanding loan balance after notification the the SBA that the borrower lacked an adequate basis for the necessity certification.
Businesses that have already received PPP funds in excess of $2 million should reexamine the certifications they made at the time of their loan request. All such businesses, especially public companies and private equity backed companies, should fully analyze the sources of liquidity available at the time of their loan request, and whether it would have been significantly detrimental to the business to access such capital.
What evidence of good-faith certification should borrowers with loans greater than $2 million, who are subject to review gather?
The SBA and Department of Treasury previously referenced forthcoming guidance regarding the certification review procedure. However, a recent statement by the SBA concerning the extension of the safe harbor period for return of PPP funds indicates that such guidance, if any, will not be arriving before the final safe harbor deadline. The SBA advised borrowers to review the guidance issued on May 13 (with respect to loans under $2 million being deemed to have a good faith certification) to determine whether or not to return the PPP loans on or before May 18.
In light of the lack of detail regarding the review procedure, the Gordon Rees Scully Mansukhani team recommends that Borrowers with loans in excess of $2 million (that are automatically subject to review by the SBA) should gather direct evidence or documentation emphasizing one or multiple of the following items:
- Direct impact of government issued COVID-19 pandemic orders and guidance limiting commerce, travel, or group meetings on the business (i.e., business closures, interruption of supply chains, etc.);
- Significant decline in gross receipts or revenue leading to employee layoffs or furloughs;
- Inability to support ongoing business operations and financial commitments without a payroll reduction;
- Lack of access to alternate forms of capital necessary to support ongoing business operations;
- If the Borrower does have access to traditional financing, such as a line of credit, the borrower should examine the documents for evidence that: (a) the line of credit is fully drawn; (b) there are restricted uses of funds in the loan agreement; (c) the decline in revenue caused by COVID-19 would result in payment default; (d) the decline in revenue caused by COVID-19 which would result in violation of financial covenant(s); or (e) other financial metrics exist that would result in the decrease of available funds under the line of credit.
What steps should a borrower take if it determines that funds from a PPP loan were received based on a misunderstanding of the good-faith certification standard?
If a business determines that funds from a PPP loan were received based on a misunderstanding of the good-faith certification standard, the borrower should promptly inform the lender and the SBA and repay the outstanding PPP loan balance. At this time, it is prudent that all companies with PPP loans in excess of $2 million fully analyze alternate sources of liquidity available and whether it would be significantly detrimental to the business to access such capital, especially public companies and private equity backed companies.
Under the new guidelines, borrowers have until Monday, May 18 to return all PPP funds. Any borrower that returns PPP funds in full by Monday, May 18, will be deemed by the SBA to have made the certification concerning loan necessity in good faith. The Monday, May 18 deadline is the most recent and final extension from earlier deadlines.
How will SBA determinations concerning good-faith certification effect the guarantee on the loan?
The SBA’s determination concerning the certification regarding the necessity of the loan request will not affect the SBA’s loan guarantee.
Visit our COVID-19 Task Force for ongoing updates.
Thank you to Emily Lundquist for her contributions to this alert.