SBA Issues Long-Awaited Guidance on Need Certification for PPP LoansMay 13, 2020
Today, the Small Business Administration (SBA) issued additional guidance regarding the required good faith certification of need by borrowers under the Paycheck Protection Program (PPP), providing safe harbor to all borrowers who received less than $2 million in loan proceeds.
This means that borrowers that received less than $2 million will be deemed to have made the certification in good faith. The SBA will combine all loans taken by the borrower and its affiliated entities to determine whether the borrower falls under the $2 million threshold.
For borrowers receiving more than $2 million, the guidance states that if the SBA determines that a borrower lacked an adequate basis for its certification, it will seek repayment of the outstanding PPP loan balance, and the borrower will not be eligible for loan forgiveness. If the funds are returned, SBA will not seek administrative enforcement or refer the matter to outside agencies.
Previous SBA Guidance, through FAQ 31, had stated“… 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.” While many borrowers that were not publicly traded companies would not have had access to capital markets, further guidance indicated that they would be required to exhaust available lines of credit in order to demonstrate the need for a PPP loan. Further leveraging a business in a time of economic uncertainty in order to qualify for a loan did not seem to be a viable option for many. The guidance was viewed by applicants, approved borrowers and their advisers as an unclear and subjective standard, the application of which would vary among borrowers.
Borrowers were originally given a deadline of May 7 to repay the loan in order to have their certification deemed to have been made in good faith by the SBA. That deadline was subsequently extended to May 18 in order to allow the SBA to issue further guidance in an attempt to clarify these issues.
Today, the SBA issued FAQ 46 which states:
“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.” The FAQ goes on to state “… borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance.” “If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.”
The SBA determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. In addition, given the large volume of PPP loans, the SBA determined this approach would enable SBA to focus its limited audit resources on larger loans.
As a result of this guidance, two things are now clear with respect to the need certification under the PPP:
- If your loan is under $2 million, you, as a borrower, will be deemed to have made the need certification in good faith.
- If your loan is more than $2 million and the SBA subsequently determines that there was not the requisite need, the ramifications will be limited to denial of forgiveness and repayment of the loan at the 1% interest rate if you do so upon notification of the SBA’s determination.
This guidance has provided much needed clarification on the issue crested by the SBA’s prior guidance on the need certification, especially for small business borrowers.