As round two of the Paycheck Protection Program (PPP) loans are now being funded, there has been attention focused on the topic of “who obtained the loans”. Various reports have been published about some highly publicized businesses that are restaurants, hospitality, higher education, and even an NBA team that received a PPP loan. There has been an outcry from many fronts on these types of businesses obtaining a PPP loan. As such, many of these businesses have indicated that they will be repaying the loan.
As part of the loan application, borrowers have to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operation of the Applicant”. While “current economic uncertainty” is pretty clear for many borrowers, “necessary to support the ongoing operations” may be less clear. The Small Business Administration (SBA) tried to clarify this requirement with their PPP frequently asked questions (FAQs).
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.
The SBA has recently made it clear that the above FAQ response is equally applicable to private and public companies. The SBA further indicated that borrowers that applied for the PPP prior to the issuance of the FAQ, can repay the loan in full by May 14, 2020, if the borrower cannot in good faith make the required certification.
Further, Secretary Mnuchin and the SBA have announced that any business that received a loan of at least $2 million, and other loans of less than $2 million as appropriate, will be reviewed prior to any forgiveness of the loan. The SBA indicated that additional guidance will be issued prior to May 14, 2020 on how they will review the certification.
Given the revised guidance issued by the SBA, the pending May 14, 2020 deadline for returning loan proceeds, and possible penalties if the SBA deems there was a misrepresentation of the above certification, we recommend borrowers carefully review and document their financial situation to meet the certification that the loan was necessary to continue ongoing operations. If you do receive and keep PPP funding, it is critical that you maintain complete and accurate documentation to support your eligibility for such funding, the specific use of these funds, as well as your qualifications for forgiveness under the terms of the program.