New Guidance Sheds Light on PPP Loan Eligibility and Safe Harbor

May 14, 2020 | Article

The Paycheck Protection Program (PPP) has been one of the most popular, and confusing, sources of relief available through the CARES Act. Designed as a loan with the potential to be forgiven in whole or in part, the PPP has operated with unclear guidelines, including the rules surrounding eligibility requirements.

Recent guidance indicated that borrowers should take into account their “ability to access other sources of liquidity sufficient to support their ongoing operations” when certifying PPP loan funding was necessary. This appeared to be an attempt by the government to retroactively impose new rules for loan eligibility that did not exist at the time most borrowers first applied for their PPP loan.

The SBA recently attempted to narrow the pool of eligible borrowers.

Alongside these new rules, the government also stated all loans over $2 million would be subject to a mandatory audit before any amount is forgiven. Borrowers not comfortable with these rules were offered a safe harbor to return their loan by May 18 without penalty.

New Guidance Issued on PPP Loan Funding
New guidance (in the form of Q&A #46 on the PPP FAQ Page) provides further details and a new safe harbor.

In short, any borrower that, together with its affiliates, received less than $2 million in loans will meet the new safe harbor and “be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

What is an affiliate?
The reference to affiliates is new and means that borrowers who secured loans in an amount under $2 million will be grouped together with affiliates for purposes of testing the $2 million threshold. However, affiliates (like franchisees, and businesses with a NAICS code beginning with 72) excluded from the original employee count eligibility requirements are apparently also excluded for purposes of this $2 million grouping.

Borrowers (including affiliates) with loans of $2 million or greater “will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form.” At this point, there are no further details on what form this review will take.

However, the government has clarified that if the SBA determines a borrower was not eligible for a PPP loan, the borrower can promptly pay back the PPP loan without further penalties or enforcement measures. Of course, the borrower could be worse off from a cash-flow perspective if they spent the PPP loan proceeds on payroll and other expenses that would otherwise have not been incurred in an effort to meet program guidelines, such as the 60% payroll threshold.

Keep Up to Date on PPP Loan Funding Guidance
This new guidance provides some clarity to PPP loan funding eligibility. But other items, such as what the SBA review will look like, remain unclear. It is important to keep up to date with PPP loan funding guidance as well as the steps necessary to maximize your loan forgiveness.

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