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New Guidance Available Regarding Necessity of PPP Loans

May 14, 2020

The U.S. Department of the Treasury and the Small Business Administration (SBA) have once again updated their Frequently Asked Questions (FAQs) regarding the Paycheck Protection Program (PPP).  The FAQs now include a new Question 46 addressing the SBA’s approach to reviewing borrowers’ good faith certifications concerning the necessity of their loan requests.  Question 46 comes in the wake of the stir caused by Question 31 of the FAQs, which placed a seemingly new emphasis on the importance of a borrower’s good faith certification that funds received under PPP are necessary for ongoing operations, and Treasury Secretary Steven Mnuchin’s announcement that the SBA will audit all borrowers who received PPP loans in excess of $2 million to determine whether they made the certification in good faith.  Question 31 also created a safe harbor providing that a borrower who repays its loan in full by May 14, 2020 (previously May 7), will be deemed by the SBA to have made the required certification in good faith. 

Question 46 provides that any borrower that, together with its affiliates, received loan funds of less than $2 million will be deemed to have made the required certification regarding the necessity of the loan request in good faith.  The SBA has determined this $2 million threshold to be appropriate on the basis that borrowers with loans under $2 million are generally less likely to have had access to adequate sources of liquidity.  Unfortunately, for borrowers with PPP loans in excess of $2 million, Question 46 does not provide any further guidance on what it means to have access to other sources of liquidity.  For example, is short-term debt at market interest rates considered an adequate source of liquidity, even if a borrower would have to lay off employees to be able to service the debt?   

Although Question 46 provides little guidance on the SBA’s approach to its impending audits, there are a few key takeaways:

  • If your business has received a loan with a principal amount of under $2 million, you are deemed to have certified in good faith that the loan funds are necessary for your ongoing operations.
  • Borrowers who return the funds by May 14 will not be subject to fines, penalties or prosecution.  If you did not have a good faith basis for needing the loan funds, you should avail yourself of the safe harbor.
  • If your business received a loan in excess of $2 million and you do not return the funds prior to May 14 because you believe you had a good faith basis for filing the loan application, Question 46 indicates that the only consequences for an adverse determination by the SBA should be that you must repay the funds and you will not be entitled to loan forgiveness.  In making its determination, the SBA will likely take into account the availability of other sources of liquidity.  You may be able to borrow from these very sources in order to repay the PPP funds.     

Note that Thursday, May 14, 2020, is the last day by which to return loan funds in order to qualify under the safe harbor.

Please contact Jason NavarinoRich LomuscioHannah Greendyk or any member of Riker Danzig’s Corporate and Tax Departments if you have questions or concerns about how Question 46 or the safe harbor apply to you.

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Jason D. Navarino

Jason D. Navarino

Hannah J. Greendyk

Hannah J. Greendyk

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