Paycheck Protection Program – SBA Issues Additional Guidance on Required Certification
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On April 3, 2020, participating lenders began accepting applications from small businesses and non-profit organizations as part of the $349 billion small business loan program known as the Paycheck Protection Program (PPP), which was approved as part of the CARES Act.
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As the PPP was launched, the application form provided by the SBA and participating lenders required the applicant to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations” of the applicant. No guidance was given at the time as to what factors should be considered in making this certification, particularly for applicants that had other potential sources of liquidity, whether from affiliated entities or other sources of credit.
On April 23, 2020, the SBA updated its FAQs regarding the PPP loan program to include a new Question 31 that provides additional guidance on this required certification.
Other Sources of Liquidity Should Be Considered
Question 31 of the new FAQs asks whether businesses owned by large companies with adequate sources of liquidity to support ongoing operations qualify for PPP loans. In the answer to the question, the SBA notes that while the requirement that a borrower must be unable to obtain credit elsewhere that would typically apply to an SBA loan does not apply to the PPP loan program, borrowers must nonetheless consider other sources of liquidity. The answer indicates that borrowers must make the required 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.”
Although the answer provides no guidance as to what should be considered “significantly detrimental” to a business, it does note that it is “unlikely” that a public company with a substantial market value and access to the capital markets would be able to make the required certification in good faith, and that such a company should be prepared to demonstrate the basis for the certification to the SBA.
Loans May Be Repaid Prior to May 7, 2020
To the extent that a company has already made the required certification and received a PPP loan, but is now concerned about the certification based upon the new guidance of Question 31, the answer indicates that if the loan is repaid in full by May 7, 2020, the borrower will be deemed to have made the required certification in good faith.
The SBA Focus Group of the COVID-19 Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the PPP loan program is implemented.
Author Matthew McDonald is a partner in the Corporate & Securities Department.