May 14, 2020 UPDATE: SBA guidance now provides that borrowers who received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification regarding the necessity of the loan in good faith. Thus, these borrowers no longer have to consider returning their loan.
Additionally, the new guidance relieves some of the stress for borrowers who received a PPP loan greater than $2 million and are trying to determine if they should return their loan. Read the complete update here.
May 7, 2020 UPDATE: The SBA is now extending the safe harbor repayment deadline date to May 14, 2020. PPP borrowers who applied for the loan before the April 24, 2020 guidance was issued by the SBA regarding good faith certification, and who wish to return their PPP loan, now have until May 14, 2020 to repay the loan in full and be deemed by the SBA to have made the required certification in good faith.
As businesses are receiving their approved Paycheck Protection Program Loans (PPP), and the federal government is replenishing funding for another round of these loans, the Small Business Administration (SBA), in consultation with the Department of the Treasury, continues to provide guidance to borrowers and lenders. Recent guidance has resulted in some businesses electing to return their loans.
Pursuant to the CARES Act, a borrower is required to make a good faith certification that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient[.]” Until recently, there was no guidance on this certification. However, in response to certain businesses being approved for loans that did not seem to need the loans, the SBA and Department of Treasury are now using this certification as a means to recoup those funds.
More specifically, in its continually updated Frequently Asked Questions, the SBA and Department of Treasury answered the following two questions:
- Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan? (FAQ #31)
- Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan? (FAQ #37)
The SBA issued the following response to both questions:
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 7, 2020 will be deemed by SBA to have made the required certification in good faith.
Notably, the SBA is now saying borrowers should account for whether they have access to other forms of liquidity before certifying, in good faith, that the PPP loan is necessary to support the ongoing operations of the business. Although the guidance uses a publicly traded company as an example, this restriction also applies to businesses owned by private companies. This new requirement is somewhat contrary to the actual language in the CARES Act which provides that the usual requirement in SBA loans that the borrower is not able to obtain credit elsewhere is waived for PPP loans.
A business cannot use the fact that they made the certification and applied for the PPP loan before the issuance of this guidance as an excuse. Thus, as a safe harbor, the SBA has stated that borrowers who applied for a PPP loan before this guidance will be deemed to have acted in good faith if it repays the loan, in full, by May 7, 2020.
Borrowers who make false certifications can potentially face criminal prosecution, denial of loan forgiveness and civil fines.
It is important for businesses to both determine that their economic assessment of their business did/does indicate the PPP loan was/is necessary for their business and, once it receives the loan, it uses the funds in compliance with CARES Act. The attorneys at Gawthrop Greenwood are here to help you and your business navigate these complex issues.
Gawthrop Greenwood and its team of lawyers will continue to review legislation and governmental decisions as they unfold, as we are committed to providing guidance to our clients. If you have any questions, please do not hesitate to call us at 610-696-8225.