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Print articlePaycheck Protection Program FAQ 31: The $64,000 Question
April, 2020 - F. B. Webster Day
The Small Business Administration emphasizes that businesses who participate in the Paycheck Protection Program must make a good faith certification that the loan request is “necessary” to support ongoing operations due to the current economic uncertainty. The SBA, in conjunction with the Department of Treasury, updated its list of Frequently Asked Questions to include a Question and Answer #31 (printed in full below) that states an applicant should make the determination in light of the applicant’s (a) current business activity and (b) ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.
The update calls out “large” and “public” companies, but its message should give pause to all applicants and borrowers of PPP loans, regardless of business size. Its assessment that a public company with substantial market value and access to capital markets is unlikely to qualify for the program is an example only. The factors seem just as applicable to non-public companies.
The update includes what at first glance looks like a safe harbor: “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.” So successful borrowers from the first round of PPP lending have a couple of weeks to decide whether to keep the money and the risk of having their certifications challenged. Prospective applicants are now on notice and will not have the benefit of SBA’s amnesty grant.
The guidance leaves unresolved, and raises, some big questions about this eligibility requirement, including:
More guidance on these and other issues is needed.
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.
If you have any questions, please contact our COVID-19 Task Force.
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The update calls out “large” and “public” companies, but its message should give pause to all applicants and borrowers of PPP loans, regardless of business size. Its assessment that a public company with substantial market value and access to capital markets is unlikely to qualify for the program is an example only. The factors seem just as applicable to non-public companies.
The update includes what at first glance looks like a safe harbor: “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.” So successful borrowers from the first round of PPP lending have a couple of weeks to decide whether to keep the money and the risk of having their certifications challenged. Prospective applicants are now on notice and will not have the benefit of SBA’s amnesty grant.
The guidance leaves unresolved, and raises, some big questions about this eligibility requirement, including:
- What does “necessary” mean for purposes of the certification? Must the loan be essential or does a less restrictive connotation apply?
- If the applicant’s current business activity is relatively unaffected but future activity is likely to be adversely affected by COVID-19 measures, can the certification be given?
- What evidence should applicants gather to demonstrate the basis for a good faith certification?
- What other sources of liquidity must be taken into account? For example, is the cash-rich sole shareholder of a company a liquidity source for the business?
- How do we determine whether tapping other liquidity sources can be done in a manner that is “not significantly detrimental” to the business?
- Does paying a PPP loan back before May 7 amount to an admission of bad faith in the certification?
- If a borrower pays the loan back by May 7 does that put an end to the matter? Is a federal court bound by the SBA’s having deemed the certificate to be made in good faith?
More guidance on these and other issues is needed.
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.
If you have any questions, please contact our COVID-19 Task Force.
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