On April 23, 2020, the Small Business Administration (SBA) issued clear guidance concerning the Paycheck Protection Program (PPP), mandating borrowers must need the money or else they should pay it back. The guidance is clearly an attempt to ensure PPP loans go to small businesses hurt by COVID-19, not fiscally sound companies with borrowing options.
The guidance emphasizes the certification required to obtain a PPP loan. The SBA’s application for a PPP loan requires that businesses certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This certification is broad and vague because “uncertainty” and “support” of “ongoing operations” can be interpreted to apply to almost every business in this tumultuous time of a national pandemic.
The SBA’s recent guidance, however, states that a borrower’s liquidity and ability to obtain loans elsewhere need to be taken into account when making the certification. The SBA wrote, “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.” The SBA may require borrowers to demonstrate that the basis for their good-faith certification is because the money is needed to support ongoing operations. The SBA noted that “a public company with substantial market value and access to capital markets” is unlikely to be able to make the certification. The reasoning applies with equal force to private companies that also have substantial market value and access to capital.
The SBA provided an escape hatch for companies that might not be able to demonstrate a good-faith need for the loan: pay the loan back, writing, “Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020[,] will be deemed by SBA to have made the required certification in good faith.” We believe the guidance issued on April 23, 2020, is a clear indication that the SBA and Treasury are dedicated to monitoring PPP disbursements and will likely engage in future enforcement actions.
