If Your Company Received a Paycheck Protection Program Loan - The SBA Wants to Know How Necessary Was Your Loan
November 12, 2020
On March 27, 2020, President Donald J. Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act established the Paycheck Protection Program (“PPP”), a $349 billion program administered by the Small Business Administration (“SBA”) to provide loans to small businesses for expenses such as payroll, benefits, lease and mortgage obligations, utilities, and interest on existing debt obligations. In order to obtain a loan, each PPP loan applicant was required to certify that “[c]urrent economic uncertainty makes th[e] loan request necessary to support the ongoing operations of the applicant.” The maximum loan amount was $10 million.
On October 26, 2020, the SBA published a notice requesting comment in the Federal Register about its plan to release two forms, one for for-profit borrowers and the other for nonprofits, “to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification . . . made on [the] PPP Borrower Application . . . that economic uncertainty made the loan request necessary.” While comments may be submitted through November 25, 2020, the proposed forms would require that each applicant who received a PPP loan with an original principal amount of $2 million or greater provide the completed form and supporting documentation to its lender within ten business days of its receipt of the form. Furthermore, the questionnaires do not solely seek information about the borrower’s circumstances at the time of the application, but also about the borrower’s operations after the provision of the loan.
Both forms contain two sections, one regarding the borrower’s business activities and the other consisting of a liquidity assessment. To learn more about for-profit borrowers’ business activities, the SBA asks questions regarding the borrower’s change in revenues, any applicable state or local order which required the borrower to shut down or significantly alter its business operations, and any voluntary cessation, reduction, or alteration in business operations due to COVID-19. The liquidity assessment, meanwhile, seeks information about the borrower’s cash, expenditures such as dividends and capital distributions, prepayment of outstanding debt, and salaries exceeding $250,000, as well as the borrower’s valuation and corporate ownership structure. The nonprofit borrower form seeks similar information.
While it is unclear how the SBA plans to use this information to evaluate the good-faith certification of PPP borrowers, borrowers must be prepared to provide this information. According to the forms, “Failure to complete the form and provide the required supporting documents may result in SBA’s determination that you were ineligible for either the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and SBA may seek repayment of the loan or pursue other available remedies.” Borrowers should consider working with counsel and financial advisors immediately to prepare to answer these important questionnaires.
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