SBA Issues Important Updates for Paycheck Protection Program

You might be impacted by new eligibility guidance

New funding for the Paycheck Protection Program is giving eligible businesses another chance to apply. However, new guidance could impact who is eligible, and even affect those who have already received funding.

With the Paycheck Protection Program oversubscribed after only two weeks and the initial $349 billion in funding completely exhausted, an additional $310 billion has been appropriated to the program through the enactment of the expanded Paycheck Protection Program and Health Care Enhancement Act (PPP HCEA). The U.S. Small Business Administration (SBA) forecasts that the second round of funding will likely be distributed as quickly as the first, so eligible applicants still wishing to participate should apply as soon as possible.

New guidance has significantly changed understanding of the program’s rules throughout the past month. Many applicants who were considered by banks to be eligible in early April are now considered to be ineligible.

New SBA clarifications may affect your business

On April 24, 2020, the SBA issued a supplemental Interim Final Rule (IFR #4), in relation to the Paycheck Protection Program under the CARES Act.  This IFR, the SBA’s fourth since the CARES Act enactment, includes several clarifications that may affect your business.  Some industries (including hedge funds and private equity firms) have been declared ineligible.  But the most impactful information is this:

• All borrowers must be prepared to confirm their need for the loan
• Borrowers who previously applied and determine they are no longer eligible may repay loans in full by May 7, 2020, and be deemed to have made the required certification in good faith.

Can you confirm your need?

The new IFR contains the most straightforward guidance about rules for eligibility of applicants and insufficiency of access to capital. Specifically, in bullet 2b on page 6 of IFR #4, borrowers are encouraged to confirm “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” per the Paycheck Protection Program Borrower Application Form (SBA Form 2483). Your documentation could include financial statements or projections that document the negative impact on liquidity and business operations from economic instability due to COVID-19.

Safe harbor if you applied in good faith

If you applied before these clarifications were published and are no longer considered eligible under the latest IFR, you have a safe harbor.  For borrowers who applied prior to the issuance of the IFR on April 24th who repay loans in full by May 7th, safe harbor limits regarding certification of PPP need are clarified in bullet 5 on page 9 of IFR #4: these businesses “will be deemed by SBA to have made the required certification in good faith” at the time of application. This safe harbor is to encourage borrowers to “promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.”

SBA updates FAQs per new guidance

The SBA, in consultation with the U.S. Department of the Treasury, also updated its PPP FAQ document, most notably regarding the concerns about large companies with other options accessing these funds.  To address this issue, the FAQ adds question 31, which asks:

“Do businesses owned by large companies with adequate sources of liquidity to support the business’ ongoing operations qualify for a PPP loan?”

In addition to citing the same language as cited above from IFR #4, the SBA partially answers question 31 by stating (emphasis added):

“In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.”

Don’t miss it: all borrowers must assess their need, not just large companies.  The answer goes on to read:

“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.”

Prioritize certifying your PPP loan need

Companies should be prepared to demonstrate through financial statements, projections, or other corroborating documentation the negative impact on liquidity and business operations from economic instability due to COVID-19.  Senate Committee on Small Business and Entrepreneurship Chairman, Marco Rubio, dropped hints in a statement early last week that foreshadowed the IFR and FAQ updates when he said:

“This fall, the Senate Committee on Small Business and Entrepreneurship will conduct aggressive oversight into the use of the PPP. If companies are not forthcoming, the Committee will use its subpoena power to compel cooperation.  America is in the midst of a growing economic crisis brought on by a deadly global pandemic.  Now is not the time for our nation’s companies to profit at others’ expense. We are all in this together.”

Much is left to be interpreted based on the SBA’s guidance; however, it is clear that the SBA and Treasury’s new focus on standards for certification of need should encourage all businesses applying for loan programs to confirm they can verify insufficiency of liquidity to meet ongoing operational needs.

Kaufman Rossin will continue to provide updates on these topics and others in our COVID-19 Resource Center, and we encourage you to reach out with questions. Contact me or another Kaufman Rossin professional to learn more about how this new guidance could affect your business.