Additional Funding for PPP Loans: What You Need to Know
On Friday, April 24, the House approved an additional $310 billion in appropriations for the Paycheck Protection Program (“PPP”). The approved bill also contained an additional $50 billion in appropriations for the Economic Injury Disaster Loan (“EIDL”) program and an additional $10 billion in funding for EIDL emergency grants. The U. S. Small Business Administration resumed accepting PPP loan applications on Monday, April 27, at 10:30 AM EDT from approved lenders on behalf of any eligible borrower.
As stories of businesses taking advantage of PPP loans unfold, the Small Business Administration (“SBA”) has provided some clarification as to what the required borrower certification “current economic uncertainty makes the loan request necessary to support ongoing operations” means. On April 23, a Frequently Asked Question was released which requires borrowers to assess their economic need for a PPP loan at the time of the loan application. The new guidance directs borrowers to make this certification in good faith, taking into account current business activity and the ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. A business should be prepared to demonstrate to SBA, upon request, the basis for this certification.
SBA noted that public companies likely would not be considered deserving of PPP loans given their access to capital markets and other sources of liquidity. On April 28, the FAQs were modified, making it clear that the liquidity test applied not only to public companies with access to capital markets, but also to private companies. On April 24, interim final regulations were released which noted that private equity firms and hedge funds were engaged in investment or speculation and were therefore not eligible to receive a PPP loan. In addition, the portfolio companies of a private equity firm were directed to apply the affiliation rules and reminded about the need to certify the need for the loan, “to support ongoing operations in a manner that is not significantly detrimental to the business, taking into account the ability to access other sources of liquidity.”
Borrowers who have applied for PPP funds or plan to apply for PPP funds should document the liquidity needs that prompted the PPP loan application. This is a facts and circumstances test which will be unique to each business or not-for-profit entity.
Borrowers who applied for a loan before April 23, 2020, and who determine in good faith that such a need does not exist, can repay the loan in full by May 7, 2020, and will be deemed to have made the required certification in good faith. The April 24, 2020, interim final regulations note that this May 7, 2020, deadline is a limited safe harbor which is necessary and appropriate to ensure that borrowers promptly repay PPP loan funds that the borrower obtained based on a misunderstanding or misapplication of the required certification standard.
Borrowers should expect that there will be considerable scrutiny well after the forgiveness period ends where federal agencies and prosecutors will be examining the needs for PPP loans.
Cherry Bekaert’s Center of Excellence on the Paycheck Protection Program is prepared to assist you with your loan application, forgiveness computations, or interpreting the new guidance. Please contact our team if you have questions or are interested in how this applies to your unique situation.