As businesses are starting to receive their Paycheck Protection Program (PPP) loans, the concern moves from whether business owners will receive the assistance to what, and how, to collect the needed documentation to receive the maximum loan forgiveness.
On May 13, the U.S. Small Business Administration, the organization funding these loans, issued a document containing answers to commonly asked questions and their answer to #46 (see below) has created a lot of discussion this week. In short, it says that business owners who “receive PPP loans totaling less than $2 million will be assumed to have performed the required certification concerning the necessity of their loan requests in good faith.”
As a reminder, Congress established the PPP to provide relief to small businesses that were in operation on February 15, 2020 with fewer than 500 employees during the coronavirus pandemic. Relief is also available to non-profits, self-employed individuals, and independent contractors. The goal was to help employers keep their employees paid and help businesses from closing due to economic hardships brought on by shelter in place and other health and safety orders. If certain requirements were met, the loan can be “forgiven,” meaning that the business owner doesn’t have to pay it back.
While the loans can serve as a true lifeline for many small businesses, the challenges of collecting all the necessary documentation and meeting the requirements in a fluctuating work environment can be a challenge for many. Additionally, the banks giving these loans are concerned that collecting, reviewing and certifying all the paperwork for each loan will completely overwhelm their employees and keep them from doing their day-to-day work.
This new guidance is still a bit vague, but most are interpreting it to mean that the SBA (and banks issuing the loans) will be focusing most of their resources in reviewing loans for more than $2 million. This doesn’t mean that business owners who receive less than that don’t have to provide documentation to their lenders to receive forgiveness, but it does indicate that the SBA will not be as strict with these reviews. If they find that a borrower doesn’t meet the requirements for forgiveness, they will still require that the loan be repaid, but they will not pursue any charges for fraud or refer the borrower to other agencies.
We expect there to be more guidance as loan forgiveness paperwork starts coming due (8 weeks from the date the business owner receives the loan), and we will do our best to keep you informed. If we can help you in any way or answer any questions, feel free to call or email us for assistance.
46. Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.