IMPORTANT UPDATE TO THIS BLOG POST: On May 5, 2020 the SBA extended the safe harbor deadline by which recipients of PPP loans may payback the loan in its entirety and avoid the economic necessity certification to May 14.
As we previously addressed on April 28, the SBA and the Department of the Treasury have issued guidance on the Paycheck Protection Program (“PPP”) that made clear that PPP borrowers must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
Since the April 28 guidance spelling out this “economic necessity certification” there has been a flood of inquiry and consternation as to what exactly this requirement means and how it can be fulfilled. Perhaps part of the confusion is fueled by the seeming conflict with an earlier information sheet published by the SBA which said that companies do not need to look to certify that they don’t have access to other sources of credit, which is typically the case with an SBA 7(a) loan.
However, the April 28 guidance makes clear that “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 guidance goes on to say that “company[ies] should be prepared to demonstrate to SBA, upon request, the basis for its certification.”
Accordingly, companies (and their boards) should review, discuss, and reaffirm that the PPP loan is “necessary to support the ongoing operations,” or keep their doors open and employees employed. In doing that, companies should compare the PPP loan to alternative sources of funds that would be relatively “detrimental” to securing PPP funds.
Most importantly, companies should document all of their research, deliberations, and decisions in this regard. A company should memorialize its efforts to explore alternative sources of funds and note that alternative funds either didn’t exist or would have been “detrimental” for the company to take. The company should also prepare projections which show how long the company would be able to keep the doors open or avoid layoffs with and without the PPP loan funds. A company’s leadership should always be keeping in mind: how would I make a business case for the necessity of these funds.
The U.S. Department of Treasury and SBA have created a safe harbor repayment period until May 7, 2020. This means that any borrower who has secured funds but does not now meet the standards of the PPP under the new guidelines, can repay their loan in full by May 7, 2020 to avoid liability or consequences.
Ultimately, if a company, however, decides that they do meet the new standards, then the company should reaffirm that the PPP loan is “necessary” and reflect it in documentation (like the company’s board meeting minutes) prior to May 7, 2020.