SBA Clarifies Part Of Its Guidance on PPP Need Certification

Since late April, the SBA has released multiple pieces of guidance under its Paycheck Protection Program (“PPP”) relating to the requirement that borrowers demonstrate need for PPP funds in order to be eligible for a loan. The SBA has indicated that borrowers may not use PPP loans as a source of easy liquidity absent true need, including recent guidance that borrowers must make and certify to their need determinations “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 is currently permitting borrowers to pay back their PPP loans without penalty by May 14th if they are not sure they have met the need threshold.

The shifting guidance has left many borrowers wondering how they can demonstrate that their business’s need was sufficient to allow them to qualify for a PPP loan. Today, the SBA released new guidance in the form of an addition to its Frequently Asked Questions list. The new guidance provides a safe harbor for loans under $2 million, stating that “[a]ny borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

In addition, while loans of $2 million and above will still be subject to audit, SBA states that it will not enforce (or refer to another agency for enforcement) violations of the need certification by a PPP borrower if that borrower repays its PPP loan following notice of the violation. The new guidance clarifies that if “SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.” In requiring repayment rather than threatening to take enforcement actions, the SBA seems to have recognized the lack of specific guidance on the need certification; this is good news for borrowers who believe they “need” the PPP loans but fear the consequences of an adverse determination by the SBA.

It is not clear whether the safe harbor for smaller loans would apply to loans applied for or issued after release of the guidance, or whether it is intended to be retroactive only; and the threshold question of what qualifies as sufficient “need” has still not been addressed. PPP borrowers and applicants should continue to consider carefully whether their businesses have a true need for a PPP loan based on existing guidance, and they should make the required certification in good faith (and document the determination of applicant’s need for such PPP loan). Further, while the new guidance does not technically preclude agencies other than SBA (such as DOJ) from taking enforcement action, as a practical matter, it is unclear what the motivation would be to pursue a borrower who has repaid the loan. By contrast, borrowers whose certifications are found to be invalid and yet do not repay the loan risk further scrutiny.

You can find Choate’s prior analysis of the SBA’s guidance on demonstrating need here, and all of Choate’s updates related to the COVID-19 pandemic here.