Much of the confusion and concern for borrowers receiving PPP loans has centered on the requirement that each borrower certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” On May 13, 2020, the SBA issued further guidance regarding this “economic necessity certification,” including a new “safe harbor” for borrowers who received loans for less than $2 million.

In its newly released FAQ No. 46, the SBA provides long-awaited guidance on how it will review borrowers’ “economic necessity certification.” Critically, for borrowers that, together with their affiliates, received PPP loans for less than $2 million, the SBA will assume those borrowers performed the required certification concerning the necessity of their loan requests in good faith. According to the SBA, borrowers with loans below the $2 million threshold are less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers who obtained larger loans. This “safe harbor” should provide much-needed relief for businesses that received smaller loans but had been concerned about the SBA’s vague directives on the “economic necessity certification.”

For borrowers who received PPP loans in excess of $2 million, however, the “economic necessity certification” will remain a factor for loan forgiveness. Unfortunately, FAQ No. 46 does not provide any quantitative metrics or otherwise set a specific standard for “necessity.” The guidance merely notes that the SBA’s review of the good faith certification will be “based on [each borrower’s] individual circumstances in light of the language of the certification and SBA guidance.”

The SBA’s prior guidance on this topic, FAQ No. 31, only provides that borrowers must:

  • make a reasonable, good faith determination of need; and
  • assess “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

As an example, the guidance states that “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.”

As a practical matter, this guidance indicates borrowers who received loans in excess of $2 million should have considered alternate sources of liquidity in connection with their initial application. If other sources of liquidity were available, then the borrower would need to determine if that capital is available on terms that are not “significantly detrimental” to the business. It is recommended that these borrowers take steps now to document exactly why they believed – in good faith – that the loan was necessary, including: considerations of other sources of capital and the terms on which that capital was available; whether furloughs, layoffs or payroll reductions were implemented or anticipated absent the PPP loan; actual or foreseen disruptions to business operations; and any other steps the borrower took in light of the economic uncertainty created by COVID-19.

Finally, FAQ No. 46 further provides that if SBA determines in the course of its review that a borrower who received a loan in excess of $2 million lacked an adequate basis for the “economic necessity certification,” the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from the SBA, however, the SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.

Again, there are still many unanswered questions about the PPP, and the SBA is issuing further guidance and regulations on an almost daily basis. We are here to help guide you through this complicated and rapidly changing program. Please do not hesitate to contact us for assistance.

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