In October 2020, the SBA issued Form 3509 – Paycheck Protection Program Loan Necessity Questionnaire (LNQ) for for-profit borrowers. This form is required to be submitted by all borrowers with first draw PPP loans of $2 million or greater as part of the SBA’s loan review process to determine whether the borrower met the good faith certification requirements in being eligible for a PPP loan.
Form 3509 was open for public comment until November 25, 2020. The SBA received hundreds of comments, all of which pointed to its unfairness to the borrower and inconsistency with the good faith certification requirements of the CARES Act. The form requests data that is subsequent to the time of the loan application and also gives borrowers very limited space to explain their circumstances.
While we were hopeful to get a new form as a result of the comments, the form as it was originally released is in active use by the SBA and banks.
However, the SBA issued FAQ #53 on December 9, 2020, which has some good news for borrowers who are required to complete the LNQ. FAQ #53 addresses some of the concerns about the LNQ and makes four key comments that are favorable to borrowers:
- “This certification is required to have been made in good faith at the time of the loan application, even if subsequent developments resulted in the loan no longer being necessary.”
- “In its review, SBA may take into account the borrower’s circumstances and actions both before and after the borrower’s certification.”
- “After a borrower submits its completed questionnaire, SBA may request additional information, if necessary, to complete its review. When additional information is requested, borrowers will have an opportunity to provide a narrative response to SBA explaining the circumstances that provided the basis for their good-faith loan necessity certification.”
- SBA’s assessment of a borrower’s certification will be based on the totality of the borrower’s circumstances through a multi-factor analysis.
FAQ #53 is now part of the PPP regulations. While we do not know exactly how the SBA will administer a loan review using Form 3509, the issuance of FAQ #53 is a positive step for borrowers.
Completing LNQ Form 3509
We have been working to assist many borrowers in completing this form and want to share a few observations:
- Borrowers have 10 days to submit the form to their bank after receiving a request for completion. The bank’s request is likely to come shortly after it completes its review of the borrower’s loan forgiveness application and submits the application to the SBA for approval.
- There are six places on the form that you can provide commentary about your specific case. These are questions 3, 4, 5, and 8 in the Business Activity Assessment section, and questions 12 and 13 in the Liquidity Assessment Section. These sections are limited to 1,000 characters including spaces. Be very strategic in the use of these sections and consider abbreviating to save space (like yr for year, co for company, etc.). I have reviewed several of these forms and abbreviations are necessary to ensure you have enough space for your comments.
- The SBA issued the infamous FAQ #31 on April 23, 2020 in which it changed the rules related to the “necessity” of the loan to include:
“[T]aking into account 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 most private companies completing LNQ Form 3509, the Liquidity Assessment represents the bigger challenge. When completing the Liquidity Assessment section, we suggest that you emphasize the “significantly detrimental” language when making your case. Even though you have access to sources of liquidity, focus on the fact that using them may have been “significantly detrimental.” For instance, even though you have a line of credit or cash balance, would it have been “significantly detrimental” to your business to use those resources to fund losses rather than the PPP loan?
- The dates that you applied for, received, and began to spend the loan proceeds in relation to the April 23, 2020 date of FAQ #31 may be very important to your LNQ. For instance, we have seen instances of borrowers who received their PPP loan proceeds prior to April 23 and immediately began spending the funds to bring back their laid-off workers. If this fits your circumstances, making these arguments can only help your LNQ response since you already altered your plans, spent PPP money, and made commitments to your employees based on the existing regulations at the time and before the rules changed on April 23. These should be compelling facts to add to your case, especially if you brought back workers during a time when your revenues had not returned to a normalized level.
We have published two other blog posts related to good faith certification that you may find helpful. They are “The Changing PPP Eligibility Rules – How Does a Private Company Respond?” and “How Private Companies Can Document Compliance with the PPP’s Good Faith Certification Regarding Access to Other Sources of Liquidity.”
While the PPP undoubtedly provided much-needed relief to businesses adversely impacted by COVID-19, the program has not been without its challenges. Navigating the loan forgiveness process can be confusing, but we can help you analyze the calculations and ensure you are meeting the requirements for forgiveness. Please don’t hesitate to reach out if we can be of assistance.
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