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PPP Loan Update May 1, 2020 – Certification of your need for a PPP Loan

Everybody who applies for a PPP loan must certify under oath that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Undoubtedly, all of our local businesses who have applied and who made that certification thought there was NO DOUBT that the economic uncertainty was obvious and evident.

But then it came to light that many publicly traded companies and larger private companies applied for and received PPP loans. Although those companies technically qualified for the PPP loan, there is no doubt that the CARES Act was not intended for entities like Shake Shack and the Los Angeles Lakers.

So to address these issues, the SBA offered more pointed guidance to dissuade these types of companies from applying for the loans. But the ambiguous guidance proposed in the interim rule applies to everybody who applies for a PPP loan, including a sole proprietor. In this post, I hope to provide you some guidance to help you “paper your file” supporting certification of need, which you may need when you apply for loan forgiveness, 8 weeks after receiving your loan proceeds.

The new guidance from the SBA can keep a small business owner up at night: “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.” WHAT DOES THAT MEAN???

The short answer is, “nobody knows.” Is your credit line another “source of liquidity?” How about your savings account? Do you have to spend every dollar you have before you apply?” I cannot give you any clarity or certainty until the SBA issues further guidance, but here are some suggestions.

First, an applicant for a regular SBA loan is eligible if it is unable to obtain credit on reasonable terms from non-federal, non-state, and non-local government sources. Generally speaking, the SBA’s “credit elsewhere” test takes into account both the liquid assets of the business and its owners, and whether credit could be obtained elsewhere on reasonable terms and conditions. But the CARES Act expressly removes that requirement. Therefore, the “credit elsewhere” test is not the standard for PPP eligibility.

Second, the CARES Act requires that PPP borrowers certify in good faith “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” The SBA’s FAQ explains that applicants making the PPP loan certification should “tak[e] 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.”

So until we get further guidance, where it stands now, an applicant could have other sources of liquidity, but if the applicant is unable to access those sources without significantly damaging the business, the certification is valid.

As of now, there is no clear and certain test for determining the necessity for your PPP loan. Those of us analyzing this issue have no doubt the undeserving larger public companies and private companies with ready access to liquid assets created this problem. But the guidance applies to all of us, unfortunately.

Here’s all we can suggest at this point: document your file supporting your good faith decision to apply for the loan and receive the proceeds because the funds are necessary to support ongoing operations in light of other access to capital. Here are some suggested bullet points for your “memo to the file”:

  • How have your company’s “ongoing operations” been impacted by the economic uncertainty?
  • Does your company expect a significant reduction in its business or work?
  • If you have any “other sources of liquidity,” such as a credit line, would you use it to keep your workers employed? What other priorities for that money or credit line do you have? Would your company have to lay off employees or reduce compensation without a PPP loan?
  • Because Virginia was closed early and has been closed for several weeks, how did that affect your company?
  • How do you intend to use the funds?

This is not a comprehensive list of things to support your PPP loan application and receipt of proceeds, but some suggestions for you to consider. Keep this memo in a file, with supporting documentation. If questioned, this memo will support your analysis that your PPP certification was made in good faith. If you have doubt in your certification, you can repay your PPP loan until May 7, 2020 without penalty or further inquiry.

Yes, this is just another thing to worry about during this pandemic, but it is better to be prepared earlier than later, should your certification be questioned.

DISCLAIMER – We hope this information is helpful, but please note that this blog post does NOT constitute legal or tax advice. These are simply my observations and notes based upon information I have gathered through an analysis of the CARES Act, an analysis of proposed regulations governing the PPP, and my attendance at numerous webinars given by tax and banking experts explaining the PPP.

YOU SHOULD CONTACT YOUR LEGAL ADVISOR, TAX ADVISOR, OR BANK FOR PERSONALIZED INFORMATION FOR YOUR CIRCUMSTANCES.

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John Tarley

John is the firm's managing partner and chairs the firm's small business, zoning, and litigation practice areas.

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