We have provided an update to the “economic uncertainty” language and the good-faith certification. Read More.
The U.S. Treasury Department and the SBA are issuing new guidance on eligibility and use of Paycheck Protection Program loan funds under the CARES Act. However, their determination of ‘economic uncertainty’ and the ‘good faith certification’ made during the application process — especially as it relates to future loan forgiveness — remains unclear with businesses and advisors.
As companies apply for the PPP loan, they certify in good faith that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” While the U.S. Treasury issued guidance on April 23, 2020, we feel that additional guidance is needed.
The following are selected FAQs that relate to the economic uncertainty language. One of the key considerations is that the U.S. Treasury has now extended the date to return PPP funds to May 14, 2020. Review these FAQs as well as recent guidance we offer from the National Law Review regarding documenting your use of funds to support future forgiveness.
[FAQ] 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 “current 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.
As mentioned, on May 5, 2020, the U.S. Treasury issued guidance that extends the May 7 deadline to return PPP funds to May 14 and, importantly, stated they would provide additional guidance prior to that date.
[FAQ] 43. Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?
Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
Private Companies and Adequate Sources of Liquidity
Further clarification from FAQ 31 reiterates a concept not expressly outlined in the CARES Act regarding adequate sources of liquidity. This has led to more questions related to working capital reserves and how that may factor into the good faith certification.
[FAQ] 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
Further, the U.S. Treasury issued FAQ #38, which dictates that the SBA will review all loans in excess of $2 million. This loan size is identified as audit triggering.
[FAQ] 38. 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.
Steps and Response to PPP Loan Guidance
Here at Anglin, our team is currently offering projection modeling for businesses to assess their ability to receive partial or full loan forgiveness of the PPP loan. We are following guidance closely at the federal level to adjust our modeling and support timely advisory to small businesses at this time.
In addition, below are useful tips excerpted from a recent National Law Review article that outlines suggested documentation considerations for PPP Loan forgiveness. You can read the full article here: https://www.natlawreview.com/article/did-economic-uncertainty-make-my-ppp-loan-necessary
To assist in revisiting the initial Loan Necessity Certification, a borrower should consider working backwards to the point of time in question, and borrower should reduce to writing the consideration and analysis of the economic uncertainty and its needs for the PPP loan. Issues or factors that might be useful in the analysis include:
- The current and projected impact of COVID-19 to the business, and the uncertainties surrounding those projections, including any communications from customers or clients regarding their level of business with the borrower and their respective economic conditions;
- Recent history of the business and its performance in the wake of other economic downturns;
- Existing levels of cash reserves or cash equivalents, and the borrower’s ability to access other sources of capital and what the terms and conditions of such sources of capital might be;
- Current or projected plans for retention or reduction of workforce or payroll costs of such workforce, and the ability of borrower to reinstate such workforce to pre-COVID-19 levels;
- Reaction and measures taken by competitors to COVID-19;
- Actions or measures that borrower is considering, or has already taken, to address the economic uncertainty outside of workforce or payroll reduction.
For the borrower that revisits the Loan Necessity Certification and determines that it did make the certification in good faith, the written work product should be saved in case that part of a borrower’s PPP loan is questioned in the future. In that regard, the Treasury has advised that borrowers receiving $2 million or more of PPP loan proceeds will be audited. The audit will likely focus on the Loan Necessity Certification, as well as other aspects of the loan and loan process, including (i) number of employees, (ii) the determination of the size of the loan, and (iii) use of the loan proceeds.
If the consideration and analysis of the Loan Necessity Certification makes a borrower uncomfortable, then it should consult its advisors and maybe also consider returning the amount of any loan proceeds by May 14th.
If you have any questions regarding repaying PPP loan funds prior to this deadline, or documentation required to support loan forgiveness for your business or organization, talk to the Solutions Services Group for small business consulting services at Anglin Reichmann Armstrong.
You may also be interested in this blog post about Anglin’s PPP Loan Forgiveness Model.