Subsequent to the publishing of this item, the Treasury/SBA released FAQs 46 and 47 which clarify the certification standard and further extend the below discussed certification’s safe harbor to May 18, 2020, respectively, here. For further details on the certification standard see here.
May 6, 2020
The Treasury Department has published further guidance concerning a key borrower certification made on the Paycheck Protection Program (PPP) loan application.
Specific Provisions Provided in Recent Guidance
Interim Final Rule Safe Harbor Provisions; May 7th repayment deadline to be updated to May 14th
This interim final rule, effective April 28, 2020, provides further guidance on the Paycheck Protection Program. Among other topics, one of interest to KHA clients is the limited safe harbor. Borrowers who certified to the clause: ‘‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” but feel that they made this certification based on a misunderstanding or misapplication of the standard canturn PPP funds back in by May 7, 2020; based on a subsequent FAQ issued by the Treasury this date will be extended to May 14, 2020. Additionally, guidance has been promised to come prior to this date as to how the SBA will evaluate this certification. If borrowers do so, the Small Business Administration (SBA) will treat such a certification made prior to the date of the interim final rule as made in good faith. Obviously, this rule does little, if anything, to help clarify what is meant by the certification or what criteria should be considered. See below for the frequently asked questions obtained from the SBA website.
The Frequently Asked Questions (FAQ) link is a document authored by the SBA that is updated regularly. Three newly added FAQs of particular interest to the SBA PPP Program are the following:
FAQ #31: “Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”
From the answer, it states that those making the certification regarding: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” must do so in good faith, considering current business operations and their ability to access other sources of liquidity to support ongoing operations in a manner not detrimental to the business.
Although the CARES Act waived the credit elsewhere rule, it appears there will still be some justification required for borrowers. Lenders can rely on borrower’s certification and this FAQ does point to rules and regulations in place at the time of the loan application completion.
FAQ #37: “Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”
The response to FAQ #37 is to refer to FAQ #31’s response.
This indicates that private companies will be held to the same qualification requirements as large companies as described in FAQ #31.
FAQ #39: “Will SBA review individual PPP loan files?”
From the answer, yes, they will be reviewing loan files including all files for loans in excess of $2 million dollars and any others that they believe may warrant it.
FAQ #43: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?
From the answer, the SBA is extending the date of the safe harbor from May 7, 2020 to May 14, 2020. The answer also states the SBA will provide additional guidance on what criteria will be used to evaluate this certification prior to May 14, 2020.
How do we apply our facts to support our need for the PPP Loan? There seems to be a change in course as the CARES Act waived the credit elsewhere rule. Through the FAQs mentioned above, the Treasury clearly states borrowers should consider their ability to access other sources of liquidity.
Still many questions remain. In the event you no longer believe you meet the criteria needed to warrant the PPP loan, we recommend you consult your attorney and give serious consideration to repaying the loan by May 14, 2020.
Consideration should be given to facts and circumstances that will be unique to your business. Did you consider a reduction in force? What was the general business climate? Were you able to stay in business despite federal, state, and local orders? Did you experience declining revenues or collections? Were employees able to work? Was your supply chain interrupted? Were you required to access credit? Do you have a history of accessing credit? Do future financial projections appear uncertain as to how long you will be negatively impacted?
If you believe that you do meet the criteria, we recommend that you keep sufficient documentation including, but not limited to, your need for funding, board minutes, financial statements and projections, and your ability to access credit based on your financial projections at the time of the loan application. We can only hope for further guidance to bring clarity in this area.
As your trusted advisors, we are committed to keeping you well-informed with any new legislation passed by Congress or other authorities as well as any new pronouncements by the Department of Treasury that may affect you. Please do not hesitate to reach out to KHA with any additional questions you may have.
These sources are simply included for informational purposes. KHA Accountants, PLLC, its partners and others do not provide any assurance as to the accuracy of these items or the information included therein. As such, KHA Accountants, PLLC cannot be held liable for any information derived from referenced sources. This by no means is a recommendation to obtain a loan or attempt to apply for a loan. There are many unknowns at this time regarding what other stimulus (grants or other loan options) may become available with pending and future bills, executive orders, or emergency declarations to follow, that may become laws. Consult your legal and business advisors prior to making financing decisions. This is intended for illustrative and discussion purposes only.