In an apparent response to controversy related to public companies and larger concerns obtaining Paycheck Protection Program ("PPP") loans, the Small Business Administration, in consultation with the Treasury Department, today issued additional guidance to underscore that loan requests must be necessary based on the actual economic need of the borrower. The focus of the guidance, which is framed in the context of whether a borrower owned by a larger company with adequate sources of liquidity is eligible for a PPP loan, is a CARES Act requirement that borrowers certify in good faith that "the uncertainty of current economic conditions makes necessary the loan request to support ongoing operations."
Existing and prospective PPP borrowers are advised as follows:
- Review the SBA's affiliation rules, which determine whether a borrower has affiliates whose employees are to be included in the borrower's employee headcount.
- Although the SBA's normal requirement that a borrower be "unable to obtain credit elsewhere" does not apply, borrowers still must certify in good faith that they have the requisite economic need. Borrowers are specifically directed to undertake an assessment under the standards set forth in the CARES Act and related guidance.
- To satisfy the economic need test, eligible concerns should examine their current business activities together with their ability to tap "other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business."
- It is doubtful that public companies "with substantial market value and access to capital markets" are eligible for PPP financing. Upon the SBA's request, those companies will need to demonstrate that they can in fact make the required good faith certification of economic need.
- If a borrower applied for a PPP loan before the issuance of this guidance and elects to pay off the loan by May 7, 2020, the required good faith certification of economic need will be deemed to have been satisfied.
- Lenders are authorized to rely upon borrower certifications regarding the necessity of the loan.
The new guidance follows widely reported comments by U.S. Treasury Secretary Mnuchin earlier this week that there would be "severe consequences" for businesses that obtain PPP loans but do not meet the eligibility requirements.
Originally published by Stites & Harbison, April 2020
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