For PPP loan recipients concerned or confused about certifying the necessity of their loans, the SBA has issued guidelines which should provide clarity going forward. A central requirement for applying for a PPP loan was that a business certify that economic uncertainty “makes the loan request necessary to support ongoing operations” through the COVID-19 crisis. However, a lack of specific guidelines caused many businesses to question their eligibility based on the needs-based certification. The SBA issued the most recent guidance on May 13.
Essentially, the SBA guidance establishes two tiers for determining how the “certifying necessity” rule is to be applied: 1) Businesses receiving PPP loans under $2 million and 2) businesses receiving PPP loans over 2 million.
Businesses receiving PPP loans under $2 million
The SBA has stated that, by virtue of them requesting a loan of less than $2 million, smaller borrowers are “less likely to have had access to adequate sources of capital in the current economic environment.” They are thereby “deemed to have made the required certification concerning the necessity of the loan request in good faith.”
According to the SBA, businesses with less than $2 million loans would not be audited so that it can direct its resources at companies with larger loans. So, businesses with less than $2 million in loans can rest easy and proceed using the funds according to PPP guidelines.
Businesses receiving PPP loans greater than $2 million
The SBA has stated that it will review all loans over $2 million, looking for instances in which a business has not met the necessity requirements in good faith. The general guideline applied to these businesses for certifying necessity is that they must take “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.”
If a company is found to be ineligible, its loan will not be forgiven, and it will be required to return the funds. While initial guidance implied criminal action for businesses submitting a false claim, the recent guidance suggests that no action will be taken if the funds are returned in full. Of course, cases of outright fraud, such as claiming employees they do not have, will be prosecuted accordingly.
The SBA has noted that, under this standard, public companies would be less likely to prove necessity because they are more likely to have access to capital and other sources of liquidity.
The two-tiered application of certifying necessity should help ease the concerns of smaller borrowers while providing more clarity for larger borrowers to evaluate their loan applications.
We continue to monitor the SBA and will provide updates as they occur. Please do not hesitate to contact a Glass Jacobson advisor should you have any questions.
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