Publish Date

Apr 24, 2020

SBA Highlights Necessity Requirement for Paycheck Protection Program Loans as Additional Funds are Added to the Program

Special Tax Alert

In recent days, press reports began to identify businesses that received loans under the new Paycheck Protection Program (“PPP”). Some of these reports questioned whether certain companies should have received loans under the program when they seemed to have ready access to other sources of funds. For example, various press reports identified hundreds of public companies (which including several well-known companies) that collectively received hundreds of millions of dollars in PPP loans. Some companies, such as Shake Shack, agreed to return their PPP loan funds in response to the public outcry. But other companies were resisting the pressure to return PPP loans. The Small Business Administration (“SBA”) also took notice of these reports.

Yesterday, April 23rd, the SBA issued revised questions and answers that explain the operation of the PPP. The last question and answer in that document specifically addressed the perceived problem of public companies receiving PPP loans even if they otherwise qualify for the program. In this answer, the SBA clarified that in addition to considering the affiliation and other standards to qualify under the PPP, each borrower is required to make a good faith certification that the PPP loan is necessary to support the ongoing operations of the borrower. The answer clarifies that each borrower must assess their economic need when applying for a PPP loan, and specifically the borrower’s “current business activity and their ability to access other sources of liquidity . . . in a manner that is not significantly detrimental to the business”. And the SBA confirmed that borrowers should be prepared to demonstrate to the SBA, upon request, the basis for certifying that they need an SBA loan.

The SBA states that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.”  Although the answer specifically identifies public companies, the answer describes public companies as an example of the types of businesses that should be prepared to demonstrate their need for a PPP loan to the SBA. The SBA’s answer does not provide any objective criteria to help a business determine whether the cost of accessing other potential sources of liquidity would be “significantly detrimental”. In light of the ambiguity inherent in this standard, PPP borrowers should carefully document their current business activity when they applied for the PPP loan and the harm that accessing other potential sources of liquidity may have imposed on the business.

Finally, the SBA states that it will deem any loan repaid by May 7, 2020 to have made the necessity certification in good faith. Accordingly, any borrowers who have concerns about their ability to demonstrate that they needed a PPP loan should consider repaying their loan by May 7, 2020…