Those that have received a Paycheck Protection Program (PPP) loan have certified to their lender and the Small Business Administration that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant “. Numerous media reports stated that after the initial allocated PPP loan funds were quickly exhausted due to a significant amount of the funding being received by large companies that would not, on their face, seem to need the support the PPP loan program was intended to provide. As a result, the SBA and Treasury Department updated the program FAQs to address the necessity certification. Those with PPP loan applications in process, and those considering a PPP loan, should carefully consider their ability to make the necessity certification.
Question 31 of the FAQ addresses the certification to a limited degree. The analysis is broken into two elements. The first element requires the borrowers take into account their current level of business activity. The expectation is that to meet this first element there should be some decrease in revenue of the borrower arising from the virus crisis. The second element focuses on alternate sources of liquidity. While the requirement that borrowers be unable to obtain credit elsewhere is suspended for this program, borrowers must nevertheless “consider their ability to access other sources of liquidity to support operations in a manner not significantly detrimental to the business”. Currently, the only example in the FAQ involves public companies with access to capital markets. So far, there is no analysis regarding other sources of liquidity, such as cash on the balance sheet, available undrawn funds on an existing line of credit or the personal resources of the owners of a private company. In a subsequent update, borrowers were informed that additional guidance on the necessity issue will be forthcoming shortly.
This updated guidance is crucial because a safe harbor was created for borrowers who have received PPP loan funds but are concerned that they may not have properly made the necessity certification. Borrowers that repay the PPP loan proceeds in full by May 14, 2020, will be deemed to have made the required necessity certification in good faith.
Borrowers should be aware that in the event of a breach of the necessity certification, or any other certifications in the PPP loan application, the borrower, and in some cases, its officers, directors or owners, may be liable for civil and or criminal penalties.
Further guidance was also provided in the FAQs that an employer that received a PPP loan and repays it by the safe harbor deadline of May 14, 2020, will be eligible to receive the employer retention credit established under the CARES Act. More information on this credit may be found here.
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