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PPP and FAQ #31 and #37 - Borrowers Beware

Updated May 5, 2020

On April 28, 2020, the SBA updated the PPP Loans Frequently Asked Questions and added FAQ #37, which makes clear that the guidance issued in FAQ #31 regarding large (primarily publicly traded) companies and their certification that PPP funds are “necessary” also applies to private companies.

As part of the PPP loan application, the applicant must certify, among other things, that “current economic uncertainty makes this loan request necessary to support ongoing operations of the Applicant.”  FAQ #31 cautions borrowers that they must make the economic uncertainty 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 detrimental to the business.”

FAQ #31 goes on to state that a borrower who “applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 (this deadline has been extended to May 14, 2020) will be deemed by the SBA to have made the required certification in good faith.”

FAQ #37 states “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 was “See response to FAQ #31.” Thus, private companies need to consider the implications of FAQ #31 in assessing their economic need for the PPP loan. 

The Time to Take Action is Now

Should you decide to retain the funds, and in an effort to document your good faith, we recommend that you document your need for the funds and the rationale used in making that determination.  The extent of the assessment and the level of documentation will depend, in part, on the size of the loan. 

Inaction is not a good choice for any borrower. While the lack of guidance is quite disconcerting, a few things are clear:

  • Any borrower of more than $2 million will be audited and many borrowers of lesser amounts will be audited as well. The larger the loan, the higher the level of scrutiny is likely to be.
  • All borrowers, large and small, should be prepared to defend their good faith certification of need.
  • The best defense is to be proactive in assessing/re-assessing need by preparing projections supported by a narrative outlining key considerations and the rationale for your conclusions.

Conclusion

Private companies need to consider the implications of FAQ #31 and #37. Additionally, they must consider whether they should repay their PPP loans in full by May 14, 2020.  

Unfortunately, we have no further clarification at this time and have no way to assess what is meant by “other sources of liquidity.”  This alert is solely to make clients aware of the new guidance.

Resources:

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