By: Kyle D. Kring
On April 24, 2020, the President signed a bill that gave the Paycheck Protection Program (“PPP”) an additional $310 billion in funding over the previous $349 billion authorized by Congress last month. As you probably know by now, there has been tremendous demand for the PPP loans. This significant demand has led to some strict scrutiny of larger businesses that applied for and received loan funds. Some of these large companies have recently rejected or returned loans they received in the PPP’s initial offering, including the Los Angeles Lakers, Ruth’s Chris Steakhouse, and Shake Shack.
The PPP loan application requires that applicants certify that the current “economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This certification is consistent with the objectives of the PPP loans. However, the new law does not provide any quantitative criteria upon which borrowers should base their decision in making the required certification. Further, the PPP waived the standard Small Business Administration (SBA) loan requirement that applicants first seek alternate sources of credit before applying for the PPP loan. In addition, the PPP is silent as to how borrowers should evaluate alternative sources of funding in making the certification. In light of the potential civil and criminal penalties for submitting a false certification, the “necessity” certification’s ambiguity has caused some concern for PPP loan applicants.
As a result of the above, the SBA revised its guidance last week to make clear that large, publicly traded companies with other available financing options should not apply for the PPP loans given the certification requirements that the borrower certify that the money is necessary to maintain its operations given the economic issues presented by the coronavirus pandemic. While this new information seems to target large businesses with adequate sources of liquidity, it does raise the question of whether smaller, successful businesses might face similar increased scrutiny in the future.
On April 23, 2020, the SBA and United States Department of Treasury released updated Frequently Asked Question guidance including the addition of some new questions and answers, including the following regarding the borrower’s certification of economic uncertainty:
“31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP 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.” Borrowers must make this certification in good faith, taking 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. For example, 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.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.” (Emphasis added.)
Accordingly, any PPP borrowers who have concerns regarding their necessity certification and who may be considering repaying their PPP loans should consider doing so prior to May 7, 2020 to take advantage of the “no fault” return, safe harbor provision.
Applicants who have concerns, should consider at least the following considerations:
- “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.” (Emphasis Added.) If other sources of funds are available, they should consider the extent to which the other funds might be significantly detrimental to the business, i.e. speed of closing in relation to cash needs, repayment terms, effect of adding additional overhead, etc.
- the extent to which they did not consider alternative sources of funds at the time of their initial application.
- the pandemic and economy’s effect on business for the remainder of the year.
- documenting the applicant’s determination of necessity, including identifying and preserving documentation regarding decrease in business, decrease in housing starts, factors affecting profitability, and other economic projections for 2020.
As always, we ask you to please remember that during this time of crisis, the updates, advisories and regulations that we receive from the promulgating agency often contain ambiguities and/or are often amended, modified or updated. The opinions expressed herein are based on our reasonable interpretation of the issuing agency’s publication at the time the opinion is expressed and is therefore subject to change based on further developments. The effect of the opinions expressed may be different based on your particular circumstances, and it is recommended that you not rely upon these general opinions prior to obtaining a consultation with your legal and/or financial advisors.
If you have any specific questions regarding the PPP loan program, the CARES Act, OSHA concerns, or any other employment and business concerns, please give us a call to discuss your specific concerns and situation.