The application for any Paycheck Protection Program (PPP) loan includes a certification by the borrower that “the current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Most borrowers make this certification without a second thought. Afterall, the COVID-19 virus and governmental responses have increased the uncertainty of managing small and medium-sized business in ways that we have never experienced.
Several high-profile cases of large, well-funded organizations that obtained questionable loans under the PPP have spotlighted this certification by borrowers. In response to these cases, the SBA warned borrowers to carefully review the certification on the application to ensure that they are made in good faith. In previous guidance, the SBA stated that businesses that returned their PPP loan would be deemed to have made the certification in good faith. This guidance raised concerns by borrowers and led many companies to question whether the SBA or Treasury might retrospectively determine that they had not acted in good faith regarding the certification on their application and feel the wrath of the federal government as a result.
Thankfully, the SBA recently provided some guidance to assuage the concerns of many, although by no means all, borrowers. On May 13th, the SBA published safe harbor guidance for borrowers regarding this certification. The guidance 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.” In support of the $2 million benchmark, the SBA determined that the safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.
The SBA previously stated that all PPP loans in excess of $2 million will be subject to review for compliance with program requirements and the borrower application. Businesses that received more than $2 million may still have an adequate basis for making the certification, they are just not presumed to have made it in good faith. Therefore, at the time of application, businesses must take into account their business activity and access to other sources of liquidity to support ongoing operations in “a manner that is not significantly detrimental to business.” Although somewhat vague, this guidance emphasizes the need to consider all other options, and whether pursuing these options would be significantly detrimental to the business.
While this safe harbor guidance is welcome news, all borrowers must still be aware of the other certifications made on their loan application and ensure that all loan proceeds are spent on approved expenses. No matter what your loan amount, the key to supporting your position is documentation. Borrowers should document their entire decision-making process and any analysis performed in evaluating and applying for a loan, as well as ensuring that they have extensive documentation demonstrating how they spent the loan proceeds.
If you would like guidance or assistance regarding the PPP, or any other business issues in these uncertain times, please contact Robert Tookoian at (559) 432-4500.