Over the last week, there has been growing concern that many small businesses were unable to borrow under the Paycheck Protection Program (PPP) because funds were quickly depleted by organizations for which the program was not necessarily intended. With Congress and the President poised to approve an additional $310 billion in funding for the PPP, the Small Business Administration today announced new rules to limit the types of borrowers eligible for future loans under the program.
Under traditional SBA rules, borrowers are eligible if they are unable to obtain credit elsewhere. However, the CARES Act waived this requirement for companies borrowing under the PPP.
In its new guidance, the SBA explicitly states that, although its traditional requirement was waived for the PPP, borrowers “still must certify in good faith that their PPP loan request is necessary.”
The guidance goes on to state the following:
“…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.”
The SBA specifically indicated that public companies with substantial market value and access to capital markets would unlikely be able to make this certification in good faith.
The guidance lacks details on the specific factors private companies and nonprofits should consider when making the certification. However, it raises potential questions not just for future borrowers, but also for others that may have already received funding under the PPP. The SBA indicated that any borrower that applied for a PPP loan prior to the issuance of this new guidance and that repays the loan in full by May 7, 2020, would be deemed by SBA to have made the certification in good faith.
We expect that this new guidance will only cause further confusion around a program that has already been challenging, to say the least. We will continue to provide future updates as additional information becomes available.
If you have any questions or would like to discuss your organization’s circumstances, please contact your Kreischer Miller relationship professional or any member of our team.
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