Coronavirus Updates | Latest News

SBA Releases Guidance Regarding “Necessity” of PPP Loans

May 11, 2020

Recently, there has been public outrage over large, well-funded companies receiving Payroll Protection Program (PPP) loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Accordingly, on or about April 23, 2020, the Small Business Administration (SBA) released guidance that stated that 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), PPP borrowers still must certify, in good faith, that their PPP loan request is “necessary”. Specifically, the SBA noted that 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.”

The SBA clarified that PPP borrowers must make this certification in good faith, taking account of their current business activity and their ability to access other sources of liquidity that would be sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. The SBA specifically noted that 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.

The SBA recently issued a new interim final rule to expand the available “safe harbor” to companies for which PPP loans were not “necessary.” This interim final rule now allows those would-be PPP borrowers until May 14, 2020 to repay their PPP loans in full (the SBA’s original deadline for this was May 7). Companies that do so by this deadline will automatically be deemed to have made their certification “in good faith.” Those companies will be treated as though they never received the loan and will therefore be eligible for the Employee Retention tax credit. This rule is intended to help the SBA recapture funds that can be redistributed to small businesses that truly need them.

The SBA has indicated that it will provide additional guidance on how it will review applicants’ certification of “necessity” prior to May 14, 2020. In anticipation of that date, dealers should confer with their accountants and attorneys if they have any concerns about whether the required certification that they made in furtherance of their PPP loan application comports with the SBA’s guidance, outlined above. NADA and NJ CAR will release additional guidance from the SBA on this issue as it becomes available.

The SBA’s “Frequently Asked Questions” containing the guidance outlined above can be found HERE (see FAQs 31, 43 and 45). The text of the new interim final rule can be found HERE.