On May 13, the SBA released additional guidance [FAQ #46] addressing the good-faith certification made by PPP borrowers that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Notably, the new guidance results in two safe harbors:
- Loans Under $2,000,000 – Any Borrower that, together with its affiliates, received a PPP loan with an original principal amount of less than $2,000,000 will be deemed to have made the required certification in good faith; and
- Loans Over $2,000,000 – Any Borrower that, together with its affiliates, applied for a PPP loan prior to April 24, 2020, and received a loan with an original principal amount in excess of $2,000,000, and repays that loan in full by May 18, 2020, will be deemed to have made the required certification in good faith [FAQ #43].
Borrowers with loans greater than $2,000,000 who do not repay the loan by May 18, 2020, may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. Providing some relief to these borrowers, if the SBA determined in the course of its review that a borrower lacked an adequate basis for the required certification, the SBA will seek repayment of the outstanding PPP loan balance and will advise the lender that the borrower is not eligible for loan forgiveness. Borrowers who repay the loan will not be subject to administrative enforcement or referrals to other agencies.
Unfortunately, this new guidance provides little comfort to borrowers with loans greater than $2,000,000, especially with the SBA’s emphasis on its previous statement that all loans in excess of $2,000,000 will be subject to review. For such borrowers, the SBA review process will focus on the borrower’s good faith certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” 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.”
To assist borrowers that fall outside the new $2,000,000 safe harbor, the following analysis separates the existing guidance around this certification of necessity of the PPP loan into its component parts, each with an assumption on the applicability of the component:
- The current business activity of the Borrower – Businesses who have been entirely shut down by current governmental orders (such as restaurants, bars, and gyms), likely meet this initial threshold as their current activity has been substantially and irretrievably damaged. Outside of these clear examples, we believe that businesses that can demonstrate a clear and significant downturn in their business activities directly related to the closure orders likely meet this component.
- The Borrower’s ability to access other sources of liquidity – A business with substantial available cash and untapped credit facilities probably does not meet this component. It is unclear whether businesses that could access capital from other sources that are not readily accessible, such as additional equity from current or new investors, are considered to have another source of liquidity. That question is partially answered by the remaining two components (below). In addition, unofficial guidance has suggested that other SBA lending programs could be considered as part of the analysis.
- Are other sources of liquidity sufficient to support the Borrower’s ongoing operations – In the circumstance where a business does have an untapped credit facility, is the availability under that facility sufficient to cover ongoing operations in the current climate? What is unknown is whether a business must take into account full utilization of its credit facilities in determining its eligibility or the amount of the loan it should receive.
- In a manner that is not significantly detrimental to the business – This is the least objective of the components. If accessing a source of liquidity would force the business to substantially curtail operations or place on future operations substantial managerial, cash flow, or other restrictions, then this component may come into play. An example may be a business that by fully tapping its credit facilities and not receiving any PPP proceeds, would be forced to close later this year, but by tapping PPP proceeds and taking other steps, it is able to preserve its available capital and utilize that capital after the 8-week period to maintain operations and payroll.
We believe the key to the above analysis is being able to demonstrate that absent the PPP loan proceeds, the business would be unable to maintain its ongoing operations and level of employment.
As the eligibility review will be conducted in hindsight and likely occur at the time a borrower applies for forgiveness, each borrower should take the following steps to ensure proper documentary support for its application, good faith certification and the proper use of its PPP loan proceeds:
- Have a robust analysis, using the above elements, prepared at the time of the loan application that reflects the need for the PPP loan. This analysis could include likely impacts in the customer base of the business;
- If the PPP loan has been funded, a confirmatory analysis under the new guidance incorporating the above elements;
- Maintain a detailed tracking of the use of the PPP proceeds to ensure they have been used solely for permitted purposes, preferably at least 75% for payroll costs;
- Track actual operations to the analysis performed at the time of the loan application and to prior economic downturns;
- If there have been employee reductions, accurately track employment numbers and dates of furlough and rehiring;
- Detail other steps taken to maintain operations (such as wage and salary reductions, deferment of lease payments, etc.); and
- Demonstrate the use of other liquidity resources, if available.
The analysis outlined above is based on the guidance that the U.S. Treasury Department and Small Business Administration have provided to date, is subject to change if and when new guidance becomes available, and as the result of legislative and regulatory changes and interpretations. Readers are directed to Moye White’s website policy and terms and should not act upon the above analysis without seeking professional legal counsel.
This article was originally published in Craft Brewing Business.
A version of this article was published in ColoradoBiz Magazine.