Client Alert

SBA, Treasury Department Warn Businesses to Carefully Consider Whether PPP Loan is Necessary

Apr 29, 2020

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On April 23, 2020, the Treasury Department, in collaboration with the Small Business Administration (the “SBA”), released guidance in the form of Frequently Asked Questions (FAQ).  The potentially most significant aspect of the FAQ’s is the warning that businesses applying for, or receiving, Paycheck Protection Program (“PPP”) loans should carefully analyze whether their “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations” of the business, as required under the CARES Act.

The new guidance states that:

“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 … 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 7, 2020, will be deemed by the SBA to have made the required certification in good faith.

On April 24, 2020, President Trump signed legislation that pumped an additional $310 billion into the PPP after the $349 billion originally allocated to the program was exhausted within two weeks of the start of the PPP.  The program has received heavy criticism after many eligible small businesses were unable to receive loans before the initial PPP funds were drained, particularly after news circulated that many publicly-traded companies and other non-traditional small businesses successfully received PPP loans.  In some instances, businesses have returned their PPP loans after receiving criticism and pressure from the public.

Consequently, in this most recent guidance, the Treasury Department and SBA are advising all PPP loan applicants to carefully consider the certifications being made on their PPP loan applications, particularly whether “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the business.

Companies that have either already submitted applications or received PPP loans have until May 7, 2020, to determine whether they indeed meet the certifications made on their PPP applications.  If any such business determines that it does not meet all of the certifications set forth on its PPP application, it may return its PPP loan by May 7, 2020, and avoid liability for not meeting such certifications.

The FAQ’s also reiterate prior guidance that payments to independent contractors and sole proprietors are not to be included in the calculation of payroll.

Please see the FAQ’s, which can be found HERE, as well as our WEBSITE for further detail on these and other issues.

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This situation is continuing to evolve.  Fox Swibel will continue to monitor developments and stands ready to advise clients in connection with financing available to businesses and non-profits.  If you have questions about qualifying for or applying for emergency funding, please contact Rick Meller, David Morris or the Fox Swibel attorney with whom you regularly work.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances.  Under applicable rules of professional conduct, this content may be regarded as attorney advertising.

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