The Paycheck Protection Program (PPP), established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provides loans to eligible small businesses effected by the COVID-19 pandemic. These PPP loans can be forgiven in whole or in part.
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‘Good Faith Certification’ and PPP Loans
The PPP loan program is administered through the Small Business Administration (SBA) and traditional SBA guidance requires a borrower to demonstrate need (through, for example, documenting an inability to borrow capital from another source) before the borrower is eligible for SBA loans.
However, the CARES Act suspended this requirement for PPP loan purposes. Under the CARES act statutory language, to receive funding, an eligible borrower must make “a good faith certification” that the loan is necessary to support “ongoing operations” due to the “uncertainty of current economic conditions” and that the loan “will be used to retain workers and maintain payroll” or make payment on other eligible expenditures.
Notably, there is no required certification concerning the existing capital structure of the borrower or its access to other funding sources. Consequently, many businesses effected by the “uncertainty of current economic conditions” related to the COVID-19 pandemic applied for and received PPP loans. Some of these businesses may be partially operational and have access to capital from other sources yet still able to certify that they are borrowing due to the uncertain economic conditions. After all, the economic fallout from the COVID-19 pandemic is likely to have far reaching ramifications that could materially impact the future of an otherwise currently healthy business.
Loan Necessity Addressed in New Guidance
In response to negative press coverage regarding certain large publicly traded companies receiving PPP loans, the government issued an update to its frequently asked questions page with new question #31, copied below (emphasis added).
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 18, 2020 will be deemed by SBA to have made the required certification in good faith.
What Businesses Will This New Guidance Affect?
While question #31 is predicated on addressing “large companies with adequate sources of liquidity,” it appears portions of the answer can apply to any borrower. A follow up question and answer (#37) issued on April 28 confirms that this guidance can apply to private companies. Further, it appears the government is attempting to narrow the pool of eligible borrowers, a troubling development given that this question and answer are issued after $349 billion of loans have already been approved and funded.
The answer states borrowers must take into account their ability to access other sources of liquidity in order to make the “good faith certification” that a PPP loan is necessary to support ongoing operations. Again, this is not a requirement from the statutory language, and banks were not required to ask this question when reviewing applications. Recognizing this, the government states a borrower can repay a PPP loan in full by May 18 in order to be deemed to have made the good faith certification. An additional question and answer (#39) states the government “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” and that additional guidance will be forthcoming.
New guidance has been issued surrounding good faith certifications and safe harbors.
This development introduces a level of uncertainty for any borrower who may have access to other, non-PPP loan sources of capital, including retained earnings and other lending sources. For example, if a borrower has access to loan proceeds from another creditor, but on terms that are less favorable than the PPP loan terms, is the borrower required first to pursue that other source, even if those less favorable terms could impact the ongoing operations of the business?
What to Do During This Uncertain Period
Recently issued guidance has provided additional clarification on questions #31 and #37. New guidance now indicates any borrower, together with its affiliates, receiving less than $2 million in loans meets the new safe harbor and fulfills the requirement of a good faith certification.
Any borrower uncomfortable with their certification can return their loan, in full, by May 18, without penalty.
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