SBA Announces Retro-Active Change to Paycheck Protection Loan Program

The Paycheck Protection Program (PPP) launched in early April with little guidance provided to both borrowers and lenders. Many businesses acted quickly to determine their maximum loan amounts and submit their applications before funds would run out. Recently, there has been scrutiny related to certain recipients of the funds. In light of this, we want to ensure you are aware of the certifications that borrowers were attesting to on their loan applications. Specifically, borrowers were representing that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”.

In recent weeks, numerous articles have been published disclosing that many publically held companies received loans. As a direct response, the SBA issued new guidance on April 23rd requiring borrowers to “take 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” when certifying that a loan is/was needed. This new requirement applies to all PPP borrowers regardless of when their loan has been or will be funded. If you have, or will be receiving a PPP loan, it is very important that you evaluate and document your eligibility to receive a loan based on this new guidance. This is the first time SBA has indicated a need to consider alternative sources of liquidity to determine eligibility for a PPP loan.

Determining eligibility for a PPP loan is based on each borrower’s specific facts and circumstances. As there are no bright line tests, establishing contemporaneous documentation to support your need for the funds is recommended.

The SBA anticipates that some borrowers may not have been eligible to obtain a loan based on the new guidance. In the event these borrowers repay their loans in full before May 18th (FAQ #47), the SBA will deem that all required certifications were made in good faith.

Borrowers found to have made false certifications on their loan applications can be subject to criminal prosecution and large fines. Additionally, The Treasury Department announced that all borrowers receiving loans in excess of $2 million will have their loans “reviewed” for compliance with SBA/Treasury guidelines. In the future, it is possible a decision could be made to lower this threshold subjecting additional loans to review.

In light of the new guidance, we recommend the following:

  • Company management should consider and document to the extent applicable:
    • the “other sources of liquidity” that were considered in lieu of obtaining a PPP loan and whether accessing this liquidity would be “significantly detrimental” to the business
    • projected immediate cash flow needs, longer term cash flow forecasts
    • realization of receivables
    • changes in backlog due to current/projected economic circumstances
    • possible staff reductions if PPP loan is/was not obtained
    • economic uncertainty facing the business
    • impact of stay at home orders
    • the likelihood and immediacy of capital contributions from owners/investors
    • all other impacts to the business given current economic conditions
  • Continual monitoring of additional guidance that will be coming from SBA/Treasury

In addition, we advise you to consult with corporate counsel to document need, and to determine how the new guidance may impact your eligibility to qualify for a PPP loan. No further action should be required if you are comfortable that you meet the new eligibility requirements and have sufficient documentation to support your position. Additionally, you should note the possibility that the identity of all borrowers under this program may be disclosed by the SBA.

If you do receive and keep PPP funding, it is critical that you maintain complete and accurate contemporaneous documentation to support your eligibility for such funding, the specific use of these funds, as well as your qualifications for forgiveness under the terms of the program.

We recognize that these are difficult times and we remain committed to supporting you. If you would like to discuss this further, please do not hesitate to contact us.