Guidance on PPP Loan Eligibility
On April 28, Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza released a joint statement that all PPP loans in excess of $2M, in addition to other loans as appropriate, will be reviewed by the SBA following the lender’s submission of the Borrower’s loan forgiveness application. This statement follows earlier guidance, referred to as FAQ #31, which focused on the Borrower’s good faith certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
These statements and guidance from the SBA are causing concern among PPP Loan recipients regarding the eligibility for the loan. Although the SBA has confirmed that “[b]orrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application,” the SBA guidance also notes that (i) borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on this subsequent guidance and (ii) for borrowers who now believe that they are not eligible, by repaying the loan in full by May 7, 2020, the Borrower will be deemed to have acted in good faith. Although the SBA has promised additional guidance on the audit process, that does little to help current borrowers manage the process.
FAQ #31 attempted to clarify and limit the good faith requirements by stating:
“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.”
Outside of the public company example in the FAQ, we do not know how this new limitation will be interpreted. (Notably, FAQ #37, released on April 28, applied FAQ #31 to private companies with adequate sources of liquidity as well, but did not include any additional detail.)
In the absence of any clear guidance from the SBA, the following analysis separates this existing guidance into its component parts, each with an assumption on the applicability of the component:
- The current business activity of the Borrower – Businesses who have been entirely shut down by current governmental orders (such as restaurants, bars and gyms), likely meet this initial threshold as their current activity has been substantially and irretrievably damaged. Outside of these clear examples, we believe that businesses that can demonstrate a clear and significant downturn in their business activities directly related to the closure orders likely meet this component.
- The Borrower’s ability to access other sources of liquidity – A business with substantial available cash and untapped credit facilities probably does not meet this component. It is unclear whether businesses that could access capital from other sources that are not readily accessible, such as additional equity from current or new investors, are considered to have another source of liquidity. That question is partially answered by the remaining two components (below). In addition, unofficial guidance has suggested that other SBA lending programs could be considered as part of the analysis.
- Are other sources of liquidity sufficient to support the Borrower’s ongoing operations – In the circumstance where a business does have an untapped credit facility, is the availability under that facility sufficient to cover ongoing operations in the current climate? What is unknown is whether a business must take into account full utilization of its credit facilities in determining its eligibility or the amount of the loan it should receive.
- In a manner that is not significantly detrimental to the business – This is the least objective of the components. If accessing a source of liquidity would force the business to substantially curtail operations or place on future operations substantial managerial, cash flow, or other restrictions, then this component may come into play. An example may be a business that by fully tapping its credit facilities and not receiving any PPP proceeds, would be forced to close later this year, but by tapping PPP proceeds and taking other steps, it is able to preserve its available capital and utilize that capital after the 8-week period to maintain operations and payroll.
We believe the key to the above analysis is being able to demonstrate that absent the PPP loan proceeds, the business would be unable to maintain its ongoing operations and level of employment.
As the eligibility review will be conducted in hindsight and likely occur at the time a borrower applies for forgiveness, each applicant and Borrower should take the following steps:
- Have a robust analysis, using the above elements, prepared at the time of the loan application that reflects the need for the PPP loan;
- If the PPP loan has been funded, a confirmatory analysis under the new guidance incorporating the above elements;
- Maintain a detailed tracking of the use of the PPP proceeds to ensure they have been solely for permitted purposes;
- If there have been employee reductions, accurately track employment numbers and dates of furlough and rehiring;
- Detail other steps taken to maintain operations (such as wage and salary reductions, deferment of lease payments, etc.); and
- Demonstrate the use of other liquidity resources, if available.
Further complicating this analysis is the potential liability that businesses could face if it is later determined that this certification was made falsely. Secretary Mnuchin has indicated that applicants who misrepresented their need for a PPP loan and do not repay the loan could face criminal liability under the False Claims Act, which would come with steep fines and penalties for the company and, potentially, individual liability for executives and owners of the business. It is therefore vital for companies who are applying for PPP loans, as well as those who have already received loans, to look closely at the certifications they have made in light of the SBA’s updated eligibility guidance and the analysis outlined above.
The analysis outlined above is based on the limited guidance that the U.S. Treasury Department and Small Business Administration have provided to date, is subject to change if and when new guidance becomes available, and as the result of legislative and regulatory changes and interpretations.
Readers are directed to Moye White’s website policy and terms and should not act upon the above analysis without seeking professional legal counsel.