New guidance from Small Business Administration emphasizes “need” in Paycheck Protection Loans

April 24, 2020

Coronavirus Stimulus and Relief Alert

Author(s): Richard Michael Price, Morgan C. Nighan, Robert A. Drobnak

On April 23, the Small Business Administration (SBA) published Paycheck Protection Program (PPP) frequently asked question (FAQ) 31 clarifying that “need” is a key qualification for use and receipt of the PPP forgivable loan funds, Paycheck Protection Program — Frequently Asked Questions. The FAQ follows the admonition by President Trump and Treasury Secretary Mnuchin at Tuesday’s White House briefing that well-capitalized companies should not be using the PPP. As Secretary Mnuchin noted, “The intent was not for companies that have access to plenty of liquidity and resources.” [April 21 USA Today].

More specifically, the SBA’s FAQ 31 explains that all borrowers must actually be able to reasonably articulate a need for the PPP funds. While the CARES Act relaxes certain rules, specifically the “ordinary requirement that borrowers must be unable to obtain credit elsewhere,” from the traditional SBA 7(a) lending program, “borrowers still must certify in good faith that their PPP loan request is necessary.” That means at 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.’” The FAQ provided the example that 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.” Applicants need to conduct a review of their current projections, existing liquidity, and access to other resources.

Of course, billions of dollars of Paycheck Protection Program funds have already been loaned out. The FAQ does provide a grace period for companies that have taken out these loans to come into compliance—borrowers will have until May 7 to repay their PPP loan if they believe they cannot or could not have made this certification in good faith.

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