Navigating the SBA’s most recent PPP guidance
The latest guidance resulted in two safe harbors
On May 13, the Small Business Administration (SBA) released additional guidance addressing the good-faith certification made by PPP borrowers that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Notably, the new guidance results in two safe harbors:
- Loans under $2,000,000: Any borrower that, together with its affiliates, received a PPP loan of less than $2,000,000 will be deemed to have made the required certification in good faith.
- Loans Over $2,000,000: Any borrower that, together with its affiliates, applied for a PPP loan prior to April 24, 2020 and received a loan of $2,000,000 or more, and repays that loan in full by May 18, 2020 will be deemed to have made the required certification in good faith [FAQ No. 43].
Borrowers with loans over $2,000,000 who do not repay the loan by May 18 may still have an adequate basis for making the required certification, based on their individual circumstances. Providing some relief to these borrowers, if the SBA determines that a borrower lacked an adequate basis for this certification, the SBA will seek repayment of the loan and the loan will not be eligible for forgiveness. Borrowers who then repay the loan will not be subject to additional penalties.
Unfortunately, this new guidance provides little comfort to borrowers outside the $2,000,000 repayment safe harbor, which will still be subject to review. For such borrowers, the SBA will review the good-faith certification of necessity of the PPP loan, 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.”
To assist such borrowers, the following analysis separates the existing guidance around this certification of necessity of the PPP loan into its component parts:
Current business activity of the borrower
Businesses entirely shut down by governmental orders (such as restaurants, bars and gyms), likely meet this threshold as their current activity has been substantially and irretrievably damaged. Outside of these examples, businesses that can demonstrate a clear and significant downturn in their business directly related to the closure orders likely meet this component.
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 investments, are considered to have another source of liquidity.
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 consider full utilization of its credit facilities in determining its eligibility.
In a manner that is not significantly detrimental to the business
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 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, is able to preserve its available capital and utilize it to later maintain operations and payroll.
Key to the above analysis is demonstrating that absent PPP loan proceeds, the business would be unable to maintain its ongoing operations and level of employment.
As the eligibility review will likely be conducted in at the time a borrower applies for forgiveness, each borrower should take the following steps:
- Have a robust analysis prepared at the time of the loan application that reflects the need for the PPP loan;
- Maintain a detailed tracking of the PPP proceeds to ensure they have been used as permitted;
- Track actual operations to the analysis performed at the time of the loan application and to prior economic downturns;
- If there have been employee reductions, accurately track employment numbers and dates of furlough and rehiring;
- Detail other steps taken to maintain operations; and
- Demonstrate other liquidity resources, if available.
The above should be documented on a current basis, at the time of application and as the borrower utilizes its PPP loan proceeds.