Earlier today, the SBA issued guidance to PPP borrowers regarding the borrower’s loan certification. As a reminder, all PPP loan applicants were required to make a good faith certification when applying for their PPP loan that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Treasury had granted borrowers a safe harbor until May 14, 2020 to return funds if they believed the certification was not made in good faith.
Today, the SBA published additional “Frequently Asked Questions” (“FAQs”) including Question number 46 which created a new safe harbor rule for borrowers with smaller loans to satisfy the requirement that the certification was made in good faith and was necessary to support their ongoing operations. Specifically FAQ 46 states “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” This provides some certainty and relief for borrowers receiving funds of less than $2 million.
For borrowers over $2 million, FAQ 46 goes on to say that “borrowers with loans greater than $2 million that do not satisfy this safe harbor 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.” The SBA will review applications for loans more than $2 million to determine if they believe the good faith certification was met. FAQ 46 states that, during the review, if the SBA determines that the borrower lacked an adequate basis for making the certification in good faith, then the SBA will seek repayment of the outstanding loan and the borrower will not be eligible for loan forgiveness. If the borrower repays the loan after the review and determination, FAQ 46 indicates the SBA will not pursue administrative enforcement or referrals to other agencies.
For those borrowers with PPP loans in excess of $2 million there is still a concern surrounding the good faith certification regarding the necessity of the PPP loan. If you received a PPP loan that is more than $2 million and have concerns regarding the certification, you may still return the PPP loan in full by May 14 to satisfy the original safe harbor rule. If you decide to not return the loan, the SBA has indicated your loan will be reviewed to consider your good faith certification. While SBA has not provided guidance or standards to determine when the PPP loan was necessary, a borrower’s current ongoing business activity, cash flow needs and ability to obtain other funding may be considered. Documentation should be provided and maintained for any borrower of a loan in excess of $2 million regarding factors that impacted the ongoing business activity, facts that impacted revenue or increased expenses, cash flow constraints, and other funding opportunities available for the entity. Fortunately based on the SBA guidance, even if the funds are required to be returned because the SBA deems the certification to not be in good faith, the SBA will not pursue administrative enforcement against borrowers who repay the PPP loan after receiving notification from the SBA.
What should you do? If you decide to keep your PPP loan, our advice remains the same: maintain thorough documentation of your circumstances that gave rise to your belief that a PPP loan was necessary to support the ongoing operations of your business, and of your PPP loan application, approval, utilization, and forgiveness. If you decide to return your PPP loan, be sure to return it by May 14. And, as always, be on the lookout for additional SBA guidance.