In the absence of comprehensive guidance available on how the SBA and Treasury will ultimately administrate PPP loan forgiveness, businesses have been forced to read the tea leaves that the SBA and Treasury have been slowly disseminating. The most recent clues come in FAQ #46 issued on May 13, 2020 that gives welcomed clarity on the administration’s perspective on how they will judge the over 2 million borrowers who have sought the benefits of PPP loans and their respective certifications in gaining such loans.
- FAQ #46 –Businesses have been faced with a decision of whether to return their PPP loan proceeds for fear of enforcement actions if it were to be determined their “necessity certification” made in acquiring their loans was deemed to be inappropriate. Many businesses applied for these loans seemingly within the boundaries of the statute and guidance at the time of the application, but were later made to feel criminal for having done so. The absence of comprehensive guidance on how the SBA and Treasury would ultimately make this determination of need has added to the anxiety for borrowers. On May 13, 2020 Treasury FAQs were updated to include FAQ #46 which offered welcome clarity to how the SBA would view the certification process as well as how they may approach enforcement.
- Loans Less than $2M – The guidance of FAQ #46 offered safe harbor for any loan amount less than $2M stating that these loans “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” This stipulation provides significant relief for a broad group of small businesses that obtained loans. It should be noted that this safe harbor is specific to the “good faith” element of the necessity certification. The veracity of other questions of fact in a borrower’s application (g., the payroll costs used to determine the loan amount) could still be subject to challenge.
- Loans Greater than $2M – Companies with legitimate concerns about the health of their businesses took proceeds of amounts over $2M and have had great concern about whether they should return their cash after the Treasury had indicated that every loan over $2M would be subject to a complete review. Concern among these businesses seems centered around the fact that conditions are truly uncertain, but they haven’t felt the squeeze of the COVID economy yet. This has made them question whether their “necessity certification” would be later challenged while not understanding what the consequences of that may be. FAQ #46 offers relief in the form of a path to absolution in that event. If it is determined in the review process of these loans that the necessity certification is not met and the borrower “repays the loan after receiving notification from the SBA, SBA will not pursue administrative enforcement or referrals to other agencies.”
- FAQ #47 – To allow borrowers time to appropriately respond to this new guidance, the SBA extended the safe harbor period to return PPP loan proceeds to May 18, 2020.
For a topic that seems to develop daily, FAQ #46 is the most significant guidance in several weeks for all those participating in the PPP as it helps them better understand how to manage their businesses. With this newly acquired knowledge, businesses can now make better decisions about how to manage the remainder of their loan period. Things to consider going forward:
- Returning the Cash – This guidance does much to relieve businesses from concern regarding whether to return the cash. For those with loans less than $2M, this became a much easier decision. For those with loans in excess of $2M it also becomes easier, as it would appear they are absolved of their necessity certification if they repay the cash. The issue remains of the accuracy of their loan amount as it pertains to the information provided by borrowers in obtaining the PPP.
- Document Now…Conditions Then – The guidance of FAQ #46 is revealing for those with loans in excess of $2M. It now seems clear the forgiveness process will initiate the review of the borrower’s need and loan amount. Substantiating the costs that will be forgivable should be the easy part, as these amounts are easily evidenced. Conversely, substantiating the more subjective need for the loan must be a primary documentation concern, and businesses should be accumulating files with cash flow analysis, industry benchmarks, revenue projections, etc., that support their case for the conditions that existed at the time of their application.
- Cash Management – Provided their case for need is insufficient, businesses with loans greater than $2M must adequately prepare to avail themselves of the relief provided in the FAQ. These businesses should consider managing cash in such a way that would allow them to repay the proceeds promptly if notified by the SBA to do so.