May 27, 2020
By H. Joseph Price, Jr.
Let’s begin with last month’s Small Business Administration (SBA) drama to understand this month’s SBA drama.
On April 23, the SBA updated the answer to one of its frequently asked questions – FAQ #31, to be exact – which read, “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a Paycheck Protection Program (PPP) loan?”
A summary of the SBA’s answer was: All borrowers must assess their economic need for a PPP loan under the standard established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and 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, borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, 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.”
On May 13, the SBA calmed the fears of borrowers with loans under $2 million (small PPP loan) when they answered new FAQ #46, which read, “How will SBA review borrowers’ required good faith certification concerning the necessity of their loan request?”
The answer was, any borrower that 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.
So everyone with a small PPP loan who was paying attention breathed a sigh of relief for about 48 hours. However, on May 15, the SBA released its Loan Forgiveness Application, and one of the headings on that application read, “Documents that each borrower must maintain but is not required to submit.”
The entry that caught the eye of the profession under that heading was the following:
“Documentation supporting the borrower’s certifications as to the necessity for the loan request and its eligibility for a PPP loan.”
So in light of that little bombshell, let’s examine what you do and don’t have to worry about with your small PPP loan now.
What You Don’t Have to Worry About
As mentioned above, SBA’s FAQ #46 says in part, “Any borrower that … 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.”
So apparently, even if you did not give your small PPP loan much thought but decided “if the government is handing out free money, I will get in line,” you are still protected from the government imposing civil or criminal penalties on you for violating the necessity requirement.
What You Still Have to Worry About
If you want your small PPP loan to be forgiven – who doesn’t – you need to prepare and maintain documentation evidencing the necessity of the loan to support the ongoing operations of your organization. Your first reaction to that requirement may be, “You can’t be serious.”
When you think about the speed with which the CARES Act and the PPP regulations were put together and then revised, you may ask, “Is that provision really supposed to apply to my loan?” Does it make sense to exempt small PPP loans from civil and criminal penalties for failing the necessity requirement and then deny forgiveness of the loan on the same grounds? It may not, but that is the way that the Loan Forgiveness Application reads. In addition, the “Interim Final Rules,” released by the SBA on May 22, read the same way. When it comes time to file for forgiveness of your loan, check back to see if the SBA has revised this provision, and if not, assume that you have to comply with it.
Now, before you lose sleep at night over this issue, let’s ask the question “If the necessity requirement in the Loan Forgiveness Application really does apply to borrowers of small PPP loans, will that mean that your loan is not likely to be forgiven?”
The answer is “not necessarily,” because it shouldn’t be that difficult for you to come up with some reasons why the loan was likely to be a necessity as a result of the coronavirus. It will mean that your business will have some extra paperwork to do and that it will have to retain that paperwork for six years after the loan is initially forgiven if it wants to maintain forgiveness.
Formulating Your Answer to the Government
So what sort of things will you be able to point to as reasons the loan was a necessity? Try to remember what ran through your mind when you realized your business was going to have to shut down for an indefinite period and all of your customers and suppliers were going to have to do the same thing.
The real answer to that question may be that you thought that the world was coming apart and that you’d better apply for a PPP loan because your primary banking relationship partner was just as scared about the future as you were. Be aware that that answer won’t be sufficient to grant you forgiveness as far as the government is concerned.
You need to be more specific about whose business you were worried about losing in part or in full. You then need to think about how you would react to losing that business. Would you lay off people, furlough them, shut down certain operations, or what? If you received a PPP loan, what would you do with the proceeds?
That should give you a running start on coming up with your answer that should satisfy the government. If you wrack your brain and you still don’t think your answer is adequate, give us a call and we’ll help you put it together.
A version of this article originally appeared in HR Legal & Compliance Excellence.