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New SBA FAQs on Certification of Necessity for PPP Loans

New SBA FAQs on Certification of Necessity for PPP Loans

April 30, 2020
By Tonneson
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Over the past week the Small Business Administration (SBA) have updated their FAQs under the CARES Act Paycheck Protection Program (PPP). This new guidance comes in response to criticism of public companies which certified that they were economically in need of the funding to continue to operate their businesses.

The Treasury was quoted to say that “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 guidelines issued recently (in partnership with Treasury) stated that “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.” (see Question #31 below) In addition, yesterday the SBA stated in their PPP FAQs Question #39 (see below) that all loans over $2M will be audited for necessity following the taxpayer’s application for loan forgiveness.

This new guidance, while attempting to make sure that all PPP loan applicants are qualified for these loans, has created more questions and uncertainty than it answers. It is unclear as to who and how these facts apply and what if any additional funding sources should have been considered by the applicants prior to certifying their necessity. The CARES Act specifically states that the taxpayer was not required to prove their inability to get a loan elsewhere as is normally the case before applying for a SBA loan. Although these clarifications were designed to respond to public criticism of public companies who received PPP loan funds, the guidance issued this week does not limit their requirements to publicly owned companies.

Below is a reprint of the SBA’s guidance on Questions 31, 37 and 39, for your reference. You may download a PDF of the complete list of PPP FAQs on the SBA website.

#31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: 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. (published April 23, 2020)

#37. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31. (published April 28, 2020)

#39. Question: Will SBA review individual PPP loan files?

Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming. The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1. (Published April 29, 2020.)

Please don’t hesitate to contact your tonneson + co representative should you have any questions.