The SBA published new guidance for the Paycheck Protection Program on April 23rd. To no one’s surprise given the press around the first wave of the loans, the SBA ratcheted up the certification requirements for these loans. In a PPP loan application, a borrower needs to certify that the “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the borrower. As we saw with the reporting on the initial wave of loans, publicly traded companies and other large businesses with stable operations and plenty of cash on hand received PPP loans, some receiving the maximum of $10 million. This apparently did not sit well with the SBA and Department of Treasury.
In the latest guidance the SBA states:
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.
While this guidance focuses on publicly traded companies, it is unlikely to remain there. Anyone who has experience with an ex post facto analysis by a Government agency will understand that the SBA will likely broaden the type of companies from which it will seek a “basis” for this certification. If the SBA determines that there is no good basis for the certification, a company – and the certifier – could face significant civil and criminal liability. This means that every company that plans on applying for, a PPP loan, needs to take a very hard look at its cash flow, current operations, and access to credit. If you cannot clearly justify a need for a PPP loan, you should not apply.
If you already received a loan, the SBA is providing a Safe Harbor. Everyone recognizes that the guidance for the initial wave of the PPP was unclear. In fairness, the SBA and Treasury were trying to get the program running as quickly as possible; which led to many open questions. To the Government’s credit, they realize this and are allowing any company that received a loan “prior to this [new] guidance,” an option to return the money. Thus, any company that received a loan and in hindsight should not have applied, has until May 7th to repay the loan in full to remove any questions of a bad faith certification. If you received a loan and have cash in the bank, a robust line of credit, or access to other funds or financing, you need to seriously consider returning these funds.
This is obviously complicated and there are going to be a lot of companies in shades gray between clearly needing the loan and clearly not needing it. If you are one of them, please contact us and we will help resolve any questions.