New SBA Guidance on Qualifications for a Payroll Protection Program Loan

By Janell Wilson, CPA - Partner and Harry A. Steindler, CPA - Partner

May 6, 2020
On May 5, 2020, the SBA stated that it will extend the PPP safe harbor repayment date from May 7th to May 14th. Thus, any PPP borrower who repays the loan by May 14th is deemed to have made the required certification in good faith. The SBA also indicated that it will provide guidance on how it will review the certification before the May 14th deadline.

April 30, 2020
On April 23, 2020, the Small Business Administration (SBA) provided new guidance on qualifications for Payroll Protection Program (PPP) loans in the form of a Frequently Asked Question (FAQ). This was an attempt by the SBA to define how borrowers should consider financial need when certifying, in good faith, that their PPP loan request is necessary. The following question and answer was published by the SBA in FAQ #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.

This new guidance has caused uncertainty for many small business owners. While additional guidance clarified that this FAQ applies to private as well as public companies, the SBA has not provided guidelines to determine what makes a loan “necessary.” We recommend that businesses consider this new guidance and document:

  • A financial analysis of why the loan was necessary to support ongoing operations and how the current economic conditions will impact cash flow; and
  • A financial analysis of what would likely occur if a PPP loan was not received.

Furthermore, on April 28, 2020, Treasury Secretary Steven Mnuchin stated that any small business PPP loan over $2 million will be subject to “full review” before it could be forgiven. He wants to ensure that the loans are used as intended. The primary purpose of the Paycheck Protection Program is to save jobs and keep employees on the payroll. Details of what a “full review” would entail were not provided. He also commented that “if people had other sources of liquidity, they could not take this loan.” He went on to say that firms that improperly took these loans could be subject to “criminal liability.”

Businesses that have received a PPP loan but do not meet the qualification criteria have until May 7, 2020 to repay the loan. Businesses that have submitted an application for a PPP loan but do not meet the qualification criteria may withdraw the application.

We will continue to closely monitor any other new developments and keep you informed. If you have any questions, please contact your MichaelSilver tax professionals at 847.982.0333.