Following the furor over PPP loans being given to certain public companies and the tweets of Senator Marco Rubio[1] pointing towards the certification that he indicated required a showing of need to receive a PPP loan, the SBA has added a new question to their FAQ on PPP loans.[2]

New Question 31 in the FAQ reads (with significant guidance highlighted):

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” 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. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. (all emphasis added)

While the highlighted text is not highlighted in the document, it points out the key additional guidance found in this question.  In essence, if a company does not wish to risk having to demonstrate the need for the loan, they should repay the balance by May 7, 2020.

As well, while the question only discusses public companies, it does so purely as an example.  It may be risky to assume that nonpublic companies are safe from being asked the same questions—nothing in the document specifically limits the necessity to consider sources of liquidity solely to public companies.

Will this truly result in any actions against borrowers?  And, if so, how many borrowers will face these consequences?  Only time will tell on this issue.

But clients who have or are applying for a PPP loan should be made aware they may be asked to justify the need for the loan.  Remember at this point we are still awaiting significant guidance of what will be necessary for forgiveness and it’s possible that this sort of proof the loan was necessary question could appear there.

[1] Senator Marco Rubio Twitter account (@marcorubio), https://twitter.com/marcorubio/status/1252303608370126849?s=20

[2] Paycheck Protection Program Loans Frequently Asked Questions, April 23, 2020 version, https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf , retrieved April 23, 2020.  Note the Treasury has “broken” these links in the past, so you may need to go to the main SBA CARES page at https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses and then scroll down to find the FAQ