The Small Business Administration (“SBA”) issues Frequent Asked Questions (FAQ), which are designed to provide guidance on Payroll Protection Program (“PPP”) loans. This week the SBA issued a new FAQ that addresses the requirement that the borrower of a PPP loan certify that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA has previously provided that to satisfy this certification, a borrower had to show that it did not have the "ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” If a borrower cannot meet that requirement of need, it must pay back the full loan amount with none of it forgiven.
The new FAQ eased that requirement for PPP loans under $2 million. The FAQ specifically provided that:
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.
PPP loans under $2 million will not automatically be forgiven. Rather, the borrower must still meet the three basic requirements:
- 75% of the PPP loan must be used on payroll costs;
- Each employee’s pay during the 8 weeks must not be reduced by more than 25% of the employee’s pay during the most recent full quarter during which the employee was employed; and
- The average number of full-time employee equivalents (FTEs) paid during the 8-week must be the same as the average number of FTEs paid between February 15, 2019 and June 30, 2019 OR January 1, 2020 and February 29, 2020. The borrower gets to choose the comparison period.
Under this new FQA, however, borrowers of PPP loans under $2 million will not have to show they did not have access to other funds, such as a line of credit or savings, to have the loan forgiven. Their certification of necessity will be deemed enough.
For loans of $2 million or more, SBA has announced that it will automatically audit each loan and will require proof of necessity and the lack of “access other sources of liquidity.” This does not mean that access to a line of credit or other financing will automatically disqualify the borrower from loan forgiveness. They can still show the other funds were not believed to be sufficient or would otherwise put the borrower in financial difficulty. It is very important that these PPP loan borrowers document, and keep the documentation, used to determine that the available funds were not sufficient, along with any other analysis used to determine to file for the PPP loans. If the borrower consulted any advisors on calculating the need for the loans, it would be sure to document that advice.
It is anticipated that SBA will issue soon a complete set of forgiveness guidelines. With these rapid development, WFCA is working to keep members informed and updated regarding their opportunities and obligations during the COVID-19 crisis.
Notice: The information contained in this update is abridged from legislation, court decisions, and administrative rulings, and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
