A Word Of Caution For PPP Loan Recipients With Adequate Sources Of Liquidity

Husch Blackwell LLP
Contact

The Small Business Administration (SBA) has reported that, as of April 16, 2020, at least 1,661,367 Paycheck Protection Program (PPP) loans had been made to businesses throughout the country. With the government’s refunding of the program on April 24, 2020, more companies will now have the opportunity to further the legislative purpose of the CARES Act, which is to ensure workers remain paid and employed.

Although companies are required to certify in good faith on their PPP application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” recent guidance from the SBA suggests such businesses revisit whether the loan was, in fact, “necessary.” In making this necessity determination, the SBA’s FAQ 31 specifies that all borrowers must make this certification 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. Based on the SBA guidance in FAQs 31 and 37, any borrower with adequate sources of liquidity to support ongoing operations might not be considered to have made the requisite certification in good faith. Additionally, the following types of borrowers may receive increased government scrutiny relating to the certification: public companies, large private companies, portfolio companies of private equity funds and any other company with adequate sources of liquidity to support operations. In addition to the written guidance provided by the SBA, Treasury Secretary Mnuchin has announced publicly that the SBA plans to conduct a “full audit of every loan over $2 million.”

Borrowers that had access to liquidity to support operations should first determine whether such access would have been significantly detrimental to the business. If so, then the borrower should compile all documents, correspondence, research and notes that it relied upon in coming to such conclusion. These supporting documents will be integral in the event the government audits the borrower’s loan.

Safe harbor available

Those borrowers that determine, in light of the SBA’s recent guidance, that they had adequate sources of liquidity at the time of application and that accessing such sources would not have been significantly detrimental to the business can return the loan in full by May 7, 2020, in order to “be deemed by SBA to have made the required certification in good faith.” This safe harbor was established to ensure prompt repayment of PPP loan funds that were obtained “based on a misunderstanding or misapplication of the required certification standard.” Furthermore, it binds the SBA.

This safe harbor also provides borrowers with a second chance to otherwise review their eligibility for the PPP loan. Subsequent to the enactment of the CARES Act, the SBA and Treasury have issued guidance interpreting the Act, including affiliation rules and eligibility. Borrowers should review this guidance anew and determine whether a full return of loan funds by May 7 is needed. For a discussion of affiliation rules and eligibility, see our Frequently Asked Questions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Husch Blackwell LLP | Attorney Advertising

Written by:

Husch Blackwell LLP
Contact
more
less

Husch Blackwell LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.