Updated SBA ‘Necessity’ Guidelines serve as a warning to borrowers who have already obtained or applied for Paycheck Protection Program loans
In response to the economic crisis caused by the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and devoted $ 349 billion to the Paycheck Protection Program (“PPP”) . After all funds were used up in less than two weeks and Congress worked to pass an additional stimulus package to add an additional $ 310 billion to the PPP, public discontent and dissatisfaction have grown. increase. While many struggling small businesses were unable to secure loans in the first round of the PPP, some prominent state-owned enterprises and large hotel and restaurant franchises received large PPP loans.
In light of many concerns raised about “Round 1” of PPP, in some frequently asked questions updates on April 23, 2020, April 28, 2020, and April 29, 2020, the Small Business Administration (SBA) provided additional guidance on demonstrating a borrower’s financial “need” when applying for PPP loans. Additional tips can be found in FAQ # 31, # 37, and # 39. The stated purpose of this FAQ is to clarify existing obligations under the program. On April 24, 2020, the SBA also issued an interim final rule on promissory note, authorization, membership and eligibility requirements, which reiterated the guidance provided in the FAQ. It is important to note that no changes have been made to the application, borrower certifications or eligibility conditions for PPP loans.
The PPP has suspended a certification required for other SBA loans indicating that a business is “unable to obtain credit elsewhere.” However, the SBA indicated that “PPP borrowers must always certify in good faith that their PPP loan application is necessary. Specifically, before submitting a PPP application, all borrowers should carefully review the required certification that “current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations”. The SBA went on to say that borrowers “must make this certification in good faith, taking into account their current business activity and their ability to access other sources of sufficient liquidity to support their ongoing operations in a way. that does not significantly harm the business. . “The SBA has created a safe haven for businesses that applied for a PPP loan before the new guidelines were released and now feel they can’t get that certification. If you think your business can’t get the required certification, the new guidelines state that any borrower who has applied for a PPP loan before the publication of the new guideline which returns funds before May 7, 2020, will be deemed by the SBA to have made their certification in good faith and to avoid any future exams or penalties. (FAQ # 31) Although the new FAQ provides additional information regarding the requirement of “need”, unfortunately there is still no clear and objective test or metric to determine “need”.
In light of these clarifications and comments by Secretary of the Treasury Mnuchin to the Wall Street Journal regarding the Treasury’s intention to audit PPP borrowers, it is advisable to keep clear and detailed records of: (i) your financial position business at the time you requested the loan, (ii) cash or cash flow at the time of the request, (iii) any other attempt to obtain financing or liquidity from other sources, (iv) any denial of requests from other sources of funding, (iv) any event of insolvency or inability to pay other debts, and (v) (most importantly) all disbursements and use of the proceeds of the PPP loan . FAQ # 39 provides that the SBA will review all PPP loans over $ 2 million, in addition to other loans as appropriate, after the lender submits the borrower’s loan forgiveness request. This, along with the PPP certifications and guidelines, make it clear that a borrower may be called upon to provide evidence to support the use of the PPP loan proceeds. These can include IRS tax returns, state income, payroll and UI returns, as well as payment records (such as receipts, card records, or payment receipts). If re-employment offers have been made to employees, but were not accepted, you should also document these communications, if any, to show good faith efforts to rehire your workforce.
A number of borrowers have asked about the use of P3 funds after the eight week loan cancellation calculation period has ended. The eight week period begins on the day the loan is first disbursed. (FAQ # 20). Even if the full PPP loan amount is not used during the eight week discount calculation period, funding should still be limited to the only permitted purposes (salary and benefits costs, interest on pre-existing mortgages (as of 15 February 2020), payments on pre-existing leases (as of February 15, 2020) and payments on pre-existing utilities (as of February 15, 2020)). Many borrowers set up separate accounts for receiving PPP funds so that this money is segregated from other sources of income and it is easier to demonstrate that the funds were only used for payroll and other uses. allowed (note that at least 75% of the proceeds must be used for salary costs).
The borrower’s caution is warranted in light of the assertion on the PPP application which states: “Knowingly making a false statement to obtain an SBA secured loan is punishable under the law, including under 18 USC 1001 and 3571 to a maximum prison term of five years. and / or a fine of up to $ 250,000; less than 15 USC 645 to a prison term of not more than two years and / or a fine of not more than $ 5,000; and, if subjected to a federally insured institution, under 18 USC 1014 by imprisonment for not more than thirty years and / or a fine not exceeding $ 1,000,000. Additional information regarding the risks associated with claiming and using the product can be found in our previous Customer Alert on this topic: False Claims Act and Other Potential Liability for Misuse of Protection Program Loans paychecks.